| Free Cash Flow |
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| financial accounting | |
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Free cash flow for a US company can be calculated from its public financial filings by referring to the statement of cash flows and subtracting all expenditures on "PP&E" and any other assets used to maintain or expand the business from the firm's cash flow produced by operating activities. Free cash flow is a measure of the cash produced by the firm in a given period on behalf of equity holders. One key measure of the value of a firm's equity is considered to be the present value of all free cash flows. In contrast to accounting measures of value, free cash flows are more transparent in the sense that a firm engages in less "editing" of the input values before publishing them in financial statements; they are more complete in that they factor in cash uses (and sources) typically ignored by accounting measures of income such as expansion (or shrinkage) in accounts receivables; but they require more expertise and judgment to analyze because they directly reveal the "lumpiness" in a firm's flow of capital expenditures, which accounting measures smooth out. When referring to free cash flow, one might be inclined to think of it as free from a cost standpoint. But that's not it. In this context, "free cash flow" refers to the cash generated by operating activities that is free, or available to be returned to its capital providers. VERSIONS Free cash flow is the operating cash flow, after capital expenditures, that a business generates or absorbs in a period. Freecash flow is significant because it represents the cash that is available for distribution to the company's shareholders or bondholders, if positive, or the cash that the shareholders or bondholders have to inject to finance the business, otherwise EXTERNAL LINKS |
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