|
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 -
|
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 ins..." |
|
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 compa..." |
|
|
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." |
|
Keep in touch with this topic
|
|
|
|
|
Free Cash Flow Special Interest Group
|
|
|
|
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
More Management Methods, Models and Theory
|
Log in
