1. What is free cash flow?
FCF is the cash that enters a company minus the cash that leaves it over a specific period. x.com
FCF is the cash that enters a company minus the cash that leaves it over a specific period. x.com
2. Operating cash flow (OCF)
This measures the cash generated from a company's normal business operations.
Think of it as the cash created by selling products or services. x.com
This measures the cash generated from a company's normal business operations.
Think of it as the cash created by selling products or services. x.com
3. CAPEX stands for capital expenditures. It's the money spent to maintain or grow a company's physical assets, like buildings or machinery.
🔹 Maintenance CAPEX = Investments in existing assets
🔹 Growth CAPEX = Investments in new assets for expansion x.com
🔹 Maintenance CAPEX = Investments in existing assets
🔹 Growth CAPEX = Investments in new assets for expansion x.com
4. CAPEX changes FCF
FCF can decrease when a company invests heavily in growth (high Growth CAPEX).
This isn’t always bad—growth investments create long-term value if done wisely.
Some prefer calculating FCF using only Maintenance CAPEX: x.com
FCF can decrease when a company invests heavily in growth (high Growth CAPEX).
This isn’t always bad—growth investments create long-term value if done wisely.
Some prefer calculating FCF using only Maintenance CAPEX: x.com
5. Capital allocation
Here’s how companies can allocate FCF:
âś… Reinvest in organic growth
âś… Pay down debt
âś… Mergers & Acquisitions (M&A)
âś… Pay dividends
âś… Buy back shares
Efficient capital allocation is key to long-term success. x.com
Here’s how companies can allocate FCF:
âś… Reinvest in organic growth
âś… Pay down debt
âś… Mergers & Acquisitions (M&A)
âś… Pay dividends
âś… Buy back shares
Efficient capital allocation is key to long-term success. x.com
6. Why is FCF important?
Unlike net income, FCF shows actual cash movement—not just accounting metrics.
Earnings are an opinion; cash is a fact.
Unlike net income, FCF shows actual cash movement—not just accounting metrics.
Earnings are an opinion; cash is a fact.
7. FCF Margin
Want to measure profitability?
Look at the FCF margin.
For example, Visa has a 52.0% FCF margin, generating $52 in cash for every $100 in sales. Compare that to General Electric’s 6.9%. 🤔 x.com
Want to measure profitability?
Look at the FCF margin.
For example, Visa has a 52.0% FCF margin, generating $52 in cash for every $100 in sales. Compare that to General Electric’s 6.9%. 🤔 x.com
8. FCF Conversion
Quality companies convert most of their earnings into FCF.
FCF Conversion = (Free Cash Flow / Net Earnings)
Large gaps between earnings and FCF signal low earnings quality.
Quality companies convert most of their earnings into FCF.
FCF Conversion = (Free Cash Flow / Net Earnings)
Large gaps between earnings and FCF signal low earnings quality.
9. FCF Yield
FCF Yield helps assess a company’s valuation.
The higher the FCF Yield, the cheaper the stock.
Compare this to a company's historical average for perspective. x.com
FCF Yield helps assess a company’s valuation.
The higher the FCF Yield, the cheaper the stock.
Compare this to a company's historical average for perspective. x.com
10. Beware of Stock-Based Compensation!
Some tech companies dilute shareholder value by issuing stock to employees.
To account for this, adjust FCF:
FCF = Operating Cash Flow - CAPEX - Stock-Based Compensation
Some tech companies dilute shareholder value by issuing stock to employees.
To account for this, adjust FCF:
FCF = Operating Cash Flow - CAPEX - Stock-Based Compensation
11. Bottom Line:
Free Cash Flow is a powerful metric for evaluating companies. It’s more reliable than earnings and shows you where a company stands financially.
Want to make better investment decisions? Focus on FCF and how companies allocate it! x.com
Free Cash Flow is a powerful metric for evaluating companies. It’s more reliable than earnings and shows you where a company stands financially.
Want to make better investment decisions? Focus on FCF and how companies allocate it! x.com
That's it for today.
Did you enjoy this? Grab the e-book about mastering free cash flow right here: compounding-quality.kit.com
Did you enjoy this? Grab the e-book about mastering free cash flow right here: compounding-quality.kit.com
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