So, what is Free Cash Flow? Is Free Cash Flow a scam? OR Is it something worth Your Effort learning about? Well, let me explain things to you.
But before we even dig deeper into what Free Cash Flow is all about, as to whether its a scam or worth your consideration, watch the video below.
Free Cash Flow is not a scam, but rather Free Cash Flow is a way of measuring or assessing a company’s expenditure, or how much cash a business or corporate is able to generate after accounting for the amount of money spent on maintenance of a company’s assets, such as building and equipment.
So basically, Free Cash Flow, (which abbreviated FCF) is an assessment of the amount of cash a company generates after accounting for all capital expenditures, such as buildings or property, plant and equipment.
The video below explains what Free Cash Flow is and how it works. You can watch it.
How to Calculate Free Cash Flow (FCF)
To calculate a company’s cash flow, there is a simple formula to use. In many places, you see formulas that look somehow complicated; however, I’m going to make things very easy for you to understand.
So, to find the Free Cash Flow of a Business, the simple formula to use is as shown below;
FCF = Operating Cash Flow – Capital Expenditures.
To make things very clear, this basically means the amount of money a company has left as their profit after deducting their capital expenditure (total amount of money spent) from their Free Cash Flow.
For example, let say a company named Sasso Coil’s cash flow statement reported $20 million of cash from operations and $8 million of capital expenditures for the year, then Company Sasso Coil’s free cash flow will be calculated as shown below;
$20 million – $8 million = $12 million.
Below is another video that clearly interpret what Free Cash Flow is and how it can be used, especially by investors to determine whether it is a company is worth investing it or not.
What it means is that FCF measures a company’s ability to generate cash, which is a fundamental basis for stock pricing.
Why It Is Vital to Know a Company’s FCF
Free Cash Flow, as explained above, is vital because, it help businesses or corporate institutions to determine whether they have enough cash to expand, develop, new products, buy back stock, pay dividends, or reduce the company’s debt.
Also, knowing a company or a corporate Free Cash Flow is very important because, this helps investors to determine the company’s actual Cash Flow and to gain insight into a company’s ability to generate cash.
In this way, investors are able to know whether it will be worth investing their money into a particular corporate or a company.
In addition to that, the presence of free cash flow tells an investor that a company has cash to expand, develop new products, buy back stock, pay dividends, or even reduce its debt. High or rising free cash flow is often a sign of a healthy company that is thriving in its current environment.
Also, investors should note that free cash flow relies heavily on the state of a company’s cash from operations, which in turn is heavily influenced by the company’s net income.
I you’re an investor and contemplating on how best to invest your money into a corporate institution or a particular company that will bring you some good income, I recommend you watch this video as well.
Investors should also be aware that companies can influence their free cash flow by lengthening the time they take to pay the bills (thus preserving their cash), shortening the time it takes to collect what’s owed to them (accelerating the receipt of cash), and putting off buying inventory (again, preserving cash).
Equally, it is vital to note that companies have some leeway about what items are or are not considered capital expenditures, and the investor should be aware of this when comparing the free cash flow of different companies.
However, it is also important to keep in mind that negative free cash flow is not bad in itself. Rather, if free cash flow is negative, it could be a sign that a company is making bigger investments, which will in turn earn a high return, the strategy has the potential to pay off in the long run.
So Is Free Cash Flow A Scam?
As it has been clearly and nicely expressed, Free Cash Flow is not a scam, but rather, a system used by corporate institutions or companies to calculate their Cash Flow or net income by subtracting their capital expenditure from their operating cash flow, that is their total cash, as shown in the formula above..
So, a company’s cash flow allows investors to determine if it is worth it putting their money into a particular business or corporate organization.
If you’re an investor and want to know and understand how Free Cash Flow Works and how to use it, I am pretty sure that you now have an answer to your question.
Yes, as you have rightly read, Free Cash Flow is not s any scam, but rather a way of finding how much net profit or revenue a company is able to generate by using the formula show above.
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About the Author
I’m Stephen, the founder of Jobs Online-Stephen.com. If you have have read my “About Me Page”, you will understand that my goal is to help others succeed online as I’m doing, by exposing scams and reviewing top rated products. I can help you start your online business
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