3. Cash Flow Statement Analysis
h. analyze and interpret both reported and common-size cash flow statements;
i. calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.
What is Free Cash Flow?
- Free Cash Flow (FCF) is intended to measure the cash available to a company for discretionary uses after making all required cash outlays. It accounts for capital expenditures and dividend payments, which are essential to the ongoing nature of the business.
Free cash flow = CFO - capital expenditure
What does FCFF stand for?
Free cash flow to the firm
What is Free Cash Flow to the Firm (FCFF)?
- Cash available to shareholders and bondholders after taxes, capital investment, and WC investment.
FCFF = NI + NCC + Int (1 - Tax rate) - FCInv - WCInv
= Net income
= Net non-cash charges
= After tax interest expense
= Investment in fixed capital
-WCInv` = Investment in working capital
What does FCFE stand for?
Free Cash Flow to Equity
What is Free Cash Flow to Equity (FCFE)?
- Cash available to stockholders after payments to and inflows from bondholders. This is the cash flow from operations net of capital expenditures and debt payments (including both interest and repayment of principal).
FCFE = FCFF + Net borrowing - Int ( 1- Tax rate)
Why are cash flow ratios useful to the analyst?
Financial ratios from the cash flow statement can measure a company's profitability, performance, and financial strength.
(There are 11 cash flow ratios on this page which I may want to return to later)