Calculate free cash flow

  • 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

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 
  • 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