Free Cash Flow

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Explanation of Free Cash Flow.


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The Free Cash Flow method is an expression of the amount of cash that is available for the stockholders.

Free Cash Flow Calculation

      Net Operating Profit

-     Taxes


=    NOPAT

-     Net Investment

-     Net Change in Working Capital


=   Free Cash Flow

How do corporations earn money?

They earn money by operating business units where it manufactures products or provides services. A company generates revenue by selling its products and services to another party. In generating revenue, a company incurs expenses - salaries, cost of goods sold (CGS), selling and general administrative expenses (SGA), research and development (R&D). The difference between operating revenue and operating expense is Operating Income or Net Operating Profit.

The cost of Capital, taxes and Free Cash flow

To produce revenue a firm not only incurs operating expenses, but it also must invest money in real estate, buildings and equipment, and in working capital to support its business activities. Also, the corporation must pay income taxes on its earnings. The amount of cash that's left over after the payment of these investments and taxes is known as Free cash flow (Free Cash Flow).

The use of Free Cash Flow

Free cash flow (Free Cash Flow method) is an important measurement for shareholders. The cash that remains after the payment of all cash expenses and operating investment required by the firm. It is the money that is available to pay the company's various claim holders, in particular the shareholders.

Book: S. David Young, Stephen F. O'Byrne - EVA and Value-Based Management: A Practical Guide.. -

Book: Aswath Damodaran - Investment Valuation: Tools and Techniques.. -

Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide -

Free Cash Flow Forum
  Valuation of a SACCO
In my opinion, the FCF and income cap are not suitable for valuing a SACCO (Savings And Credit Co-operative Society). This is because membership and share capital are unlimited and anyone (in some instances only those who qualify) can walk in and buy...
  Free Cash Flow => Do More with Less
This definition of free cash flow is clear enough.
My understanding is that free cash flow is one of the key elements at the source of the "do more with less culture". Some years back in my company, before the finance department started to insis...
  EVA and Free Cash Flow
What are the differences between EVA and free cash flow (FCF)? How to apply both of them?...
  Alternate Way to Find Free Cash Flow
A simpler method to extract the Free Cash Flow is to derive it from the firm's Statement of Cash Flow. Using Total Cash from Operations and subtracting Cap Ex and Dividends....

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Corporate Valuation for Businesses

Presentation that elaborates on corporate valuation, including the following sections:
1. Three types of value:
- Book Value
- Market V...
Usage (application): Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing

Construction of Free Cash Flows (2)

Second part of Pedagogical Note by Ignacioa Velez-Pareja....
Usage (application): Calculating Free CF

Construction of Free Cash Flows

Pedagogical Note by Ignacioa Velez-Pareja. Usually a great deal of effort is devoted in typical financial textbooks to the mechanics of the calculatio...
Usage (application): Calculating Free CF

Buying the Asset versus Buying the Cash Flows

In this video Stephen Yacktman explains that you can buy an asset:
- To speculate on an (uncertain) increase in value (like a brick of gold) with...
Usage (application): Understanding the Difference BetweenBuying the Asset versus Buying the Cash Flow


Free Cash Flow Method


Corporate Earnings


Free Cash Flow Method


Corporate Earnings


Free Cash Flow Method


Corporate Earnings


Free Cash Flow Method


Corporate Earnings

Compare with: Discounted Cash Flow (DCF)  | Internal Rate of Return (IRR)  |  Management Buy-out  |  Cost-Benefit Analysis  |  Total Cost of Ownership

Return to Management Hub: Decision-making & Valuation  |  Finance & Investing

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