- Represents the cash a company generates after cash outflows to support operations and maintain its capital assets.
- Available once firm covered capital expenditures
- Often used for valuation
- Two main measures of free cash flow
- Free cash flow to the firm (FCTF) (4)
- Free to all investors: debt holders + equity owners
- Calculate from net income
- Calculate from CFO (5)
- Change in working capital and non-cash charge is already included in CFO
- Dividends paid would be added back to CFO if firms follow IFRS
- Free cash flow to the firm (FCTF) (4)
Calculate free cash flow to Equity
- Free Cash Flow to Equity (6)
- CF that would be available for distribution to common shareholders
Calculate free cash flow to Equity
- Other CF Ratios (7)
- Performance Ratios:
- Cash flow to revenue (8): amount of CFO generated for each dollar of revenue
- Return on assets (9)
- Return on equity ratio (10): return of CFO attributed to shareholder
- Cash-to-income (11): ability to generate cash from operation
- Cash flow per share (12): variation of basic earnings per share
- Cash flow to revenue (8): amount of CFO generated for each dollar of revenue
- Performance Ratios:
- Converge ratio (8)
- Debt coverage ratio (13): financial risk and leverage
- Interest coverage ratio (14): ability to meet interest obligation
- Reinvestment ratio (15): ability to acquire long term assets
- Debt payment ratio(16): ability to satisfy long-term debt
- Dividend payment ratio(17): ability to make dividend payment from CFO
- Investing and financing ratio(18): ability to purchase assets, satisfy debts and pay dividends
- Debt coverage ratio (13): financial risk and leverage