Posts Tagged ‘free cash flow’

Free Cash Flow Versus Operating Cash Flow

I’ve been writing recently about cash flow, specifically in regards to important ratios to interpret it. The free cash flow to operating cash flow ratio is a useful measurement. Let’s see how it is calculated and what it means.

First Some Definitions

Generally free cash flow (abbreviates as FCF) is considered to be operating cash flow minus capital expenditures. (See Importance of Free Cash Flow)

Operating cash flow (OCF) is calculated as net income adjusted for non-cash charges and changes in current assets and liabilities. (See Operating Cash Flow Defined) In this calculation net income does not show the effect of interest and income taxes, so it is actually earnings before interest and income taxes (Abbreviated EBIT).

Calculating the Free Cash Flow to Operating Cash Flow Ratio

The formula for calculating the free cash flow to operating cash flow ratio, expressed as a percentage is: Read the rest of this entry »

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Importance of Free Cash Flow

In some previous posting I discussed how important it was to convert profits to cash. See Cash Flow – The Bottom Line for more on this. Now let’s look at cash from a different perspective.

Free Cash Flow Defined

Generally free cash flow is considered to be operating cash flow minus capital expenditures. This recognizes that capital spending for things like equipment is necessary if a company is to remain competitive. These capital expenditures help a company become more efficient or even allow them to Read the rest of this entry »

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