Generally during an annual or quarterly earnings report, a company will indicate its Free Cash Flow (FCF) to investors and shareholders. Free cash flow is the amount of cash available after a company has paid its operations and other capital expenditure.
Usually, investors or shareholders will use the free cash flow as an indication of the company’s financial health, performance, well-being, and business model.
Companies can use the free cash flow to reinvest it back into the business to expand its operations, hire new employees, or invest in the development of newer products and services.
Free Cash Flow is the total amount of cash available after all deductions and operational costs have been covered.
To calculate free cash flow, a company would follow this formula:
Net cash from operations – Capital Expenditure = Free Cash Flow or FCF.
Net income on the other hand again refers to the company’s overall profitability. The net income is calculated as follows:
Total Revenue (Sales) – All costs and expenses = Net Income
Shareholders can use the net income as a way to measure whether a company is profitable for the long-term gain.
FCF shouldn’t be the only metric from which a person or shareholder should determine the overall financial health of a business or company.
Limitations regarding FCF include:
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