Skip to main content
Message Font: Serif | Sans-Serif
No. of Recommendations: 1
There is a ton of jargon out there and as a new investor of
individual stocks (previously only invested in mutual funds)
I'm trying to learn the ropes so that I can make informed
investment decisions and not just put it all on trust in the
hands of M*, S & P, Cramer, etc.

My first question has to do with earnings vs. free cash flow.

Many people say that FCF is a better indicator of Co. health
but it seems like it really depends. As far as I understand it
FCF is the total cash that flows into or out of a Co. in a
given time frame. This means that if a Co. takes out a
$100 million dollar loan this loan would increase FCF. Yet
this does not necessarily mean the Co. is financially
healthier. On other hand if a Co. has a hard time collecting
its bills this would not be reflected in earnings statements
but would decrease FCF. So clearly both earnings and FCF
are important.

I guess my question is this: it seems as if FCF
tells how healthy a Co. is today but the earnings statement
often tells more about future health. If a Co. is raking in
a ton of money but much of it is going into re-investments
that may make a ton more money in the future then the FCF may
be low but future health very good. Especially for a small,
emerging Co. For a well established Co. that isn't investing
a lot to get going I would think that how well its doing now
would be also a good indicator of future and so FCF would
be very important. I was just wondering what people's thoughts
were... am I close or entirely off base?

My other question is this: what the heck is the difference
between "free cash flow" and just ordinary "cash flow".
For example google finance compares P/CF and p/FCF.

I've been trying to google to find out this difference
but after extensive searching I've gotten no help that
really makes sense.

If anyone could answer these questions it would be much
appreciated. Thanks,

Print the post Back To Top
No. of Recommendations: 1
Many people say that FCF is a better indicator of Co. health
but it seems like it really depends.

This is only because companies regularly manipulate earnings, but haven't yet figured out how to manipulate the FCF measures. Once companies start manipulating the FCF numbers, this will no longer be true.
Print the post Back To Top
No. of Recommendations: 0
Hello Jon,

Your questions are thoughtful. I too have wrestled with cash flow, and it appears that, since there is no industry-appropriate "cash flow ratio" to judge cash flow adequacy, about the best one can do is to look at cash flow from operations to see what it is being used for, e.g., what kinds of capital expenditures (aka capex) are being made, and whether those expenditures are appropriate for that company. One must know the company well to make this kind of evaluation.

Also, I have heard that cash flow should be growing over time in absolute terms as well as in terms of cash show per share.

When looking at cash flow do not forget to look at all-important ratios such as debt to equity, and times interest earned. Gotta be able to pay those bills.

I will defer speaking to your second question.


Print the post Back To Top