In partnership with

DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS, MEANING I GET A COMMISSION IF YOU DECIDE TO MAKE A PURCHASE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FOR MORE INFO.

Follow the Money!!

Cash is the Ultimate Determinant of Business Value

RIIQ Pro Newsletter

More robust content and deep insights & analysis related to Investing reserved for Raising InvestorIQ premium subscribers

Good morning investors!

Every Thursday morning we publish “RIIQ Key Investing Insight” — a deep-dive article designed to truly provide you with leading and practical insight to help you become a strategic investor. Members get to learn key aspects of investing wisdom that we regularly apply in our long-term, value-oriented investment decisions. And, in turn, we provide you with the ability to apply them yourself as you continue along your investing journey.

Grab your coffee and let’s dive in!

Deep-Dive

Intro

Let’s be real – when it comes to investing, many people get excited by headline-grabbing figures like revenue growth or net income. But if you’re only looking at those numbers, you might miss a crucial part of the picture: free cash flow (FCF).

Free cash flow is one of the most insightful metrics you can use to understand how well a company is really performing, especially when you’re looking for long-term value and sustainability. Today, we’re going to break down what free cash flow is, how to calculate it, and why it’s so important for investors like you.

What Is It Exactly?

You’ve probably heard the term before, but what does it really mean? In simple terms, free cash flow represents the cash a company has left after paying for its operating expenses and capital expenditures (such as property, equipment, or inventory). It’s the money the business can use to pay off debt, reinvest, distribute dividends, or keep in reserve for future opportunities.

The beauty of FCF is that it strips out non-cash items like depreciation and amortization, giving a clearer picture of how much actual cash a company is generating.

For investors, FCF is a goldmine because it provides insight into a company’s true financial health, beyond the sometimes-manipulated net income figures. And guess what?

It’s easier to calculate than you might think! Let’s look at a practical example…

For Those Who Seek Unbiased News.

Be informed with 1440! Join 3.5 million readers who enjoy our daily, factual news updates. We compile insights from over 100 sources, offering a comprehensive look at politics, global events, business, and culture in just 5 minutes. Free from bias and political spin, get your news straight.

Join for free today!

FCF: How Do You Calculate It?

There are a few ways to calculate FCF, but here’s the simplest method:

1. Start with the operating cash flow (OCF): This is the cash the company generates from its core business operations. It can be found directly on any company’s Statement of Cash Flow.

2.  Subtract capital expenditures (CapEx): These are investments in long-term assets like equipment, technology, or new facilities.

So, the formula looks like this:

That’s it! This quick calculation gives you a snapshot of how much cash is left after the business has reinvested in itself.

Let’s look at an example.

Imagine you’re analyzing a company’s financials for two years. In the first year, the company’s cash flow from operations was $500,000, and its capital expenditures were $200,000. Using the formula above, the FCF is $300,000.

Now, fast forward to the next year. The company’s cash flow from operations increased to $600,000, while capex remained steady at $200,000. In this case, the FCF will be $400,000. This means the company generated $100,000 more in free cash flow than the year before.

Great news for potential investors! However, rising cash flow isn’t the only thing to consider. You have to analyze how sustainable that FCF growth is and what factors are driving it.

What It Tells You

Free cash flow isn’t just a number to glance at—it can offer deep insights into how a company operates.

Here are three key things FCF can tell you:

RIIQ Pro Newsletter

For more robust and meaningful Investing insight & analysis, consider subscribing to RIIQ Pro, our premium newsletter:

• A company-specific Deep-Dive Analysis (provided weekly)

• A detailed write-up of a RIIQ Key Investing Insight (provided weekly)

• RIIQ Top 10 Watchlist - a list of the top 10 companies being monitored and evaluated heavily due to varying factors, along with details of why they may be in our top 10 (provided monthly)

• BONUS: A FREE download of Legendary Investor Insights. 10 pieces of practical wisdom from legendary investors like Warren Buffett, Peter Lynch, Charlie Munger, and many more.

Sign up now for a limited-time offer of only $9.95 per month!

Subscribe to RIIQ Pro to read the rest.