![]() ![]() It might be argued that the investments done today by the company would lead to revenue & profits in the future and would generate wealth for the shareholders. In both cases, the situation of companies continuously raising debt/equity to meet their cash flow requirements becomes less attractive for investors as compared to the companies that are able to meet their funds’ requirements from their cash flow from operations. ![]() ![]() These funds, if raised from debt, would decrease profitability by interest expense and increase bankruptcy risk and if raised from equity, would lead to dilution of the stake of existing shareholders. Such a company would have to raise funds from additional sources like debt or equity dilution to meet its requirements. If a company does not have positive free cash flow, it means that it is spending beyond its means. The scenario is exactly the same for companies as well. Debt pressure increases the bankruptcy risk and leads to stress in our lives. The debt, which we raise to fund our expenses, needs to be paid at predefined intervals irrespective of the fact whether we are able to save in future/have our job intact or not. We would have to borrow from relatives/banks etc. are not able to save anything, then our financial health is going to suffer a lot in future. If we as households are not able to manage our expenses within our means of income, i.e. (NFA + CWIP) at the end of the year – (NFA + CWIP) at the start of the year + Depreciation for the yearįree cash flow (FCF) is the most essential feature of any business as it amounts to the surplus/discretionary cash that the business/company is able to generate for its shareholders. FCF is the equivalent of savings for a household. (GFA + CWIP) at the end of the year – (GFA + CWIP) at the start of the year It can also be calculated by deducting net fixed assets & CWIP at the start of the year from the net fixed assets & CWIP at end of the year and adding back the depreciation for the year. Capex = capital expenditure including maintenance capex and capital work in progress (CWIP)Ĭapex for any year can be calculated as the difference between gross fixed assets (GFA) & CWIP at the start of the year and the end of the year.It is calculated as the surplus cash with the company after meeting its capital expenditure requirements. We believe that free cash flow (FCF) is the ultimate measure of the investability of any company. The article also includes responses to the queries asked by readers about various finer aspects of Free Cash Flow analysis. The current article explains the concept of Free Cash Flow (FCF), its importance in investment decision-making along with illustrative examples of companies with a positive free cash flow and with a negative cash flow. ![]()
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