Free Cash Flow
The best way for a public company to keep its shareholders happy is to ensure that the stock price keeps going up, up and up. And the best way to do that is to increase profitability and overall value by developing new products and services, streamlining operations or acquiring new subsidiaries. Since expansion requires lots of available cash, that's what investors are looking for with a measurement called free cash flow (FCF).
To calculate free cash flow, you need two figures, both of which are found on a statement of cash flows: operating cash flow and capital expenditures. Operating cash flow is easy to find; it's the bottom line of the cash flow from operations section, sometimes called net cash from operations. Capital expenditures is found in the cash flow from investments section and is either listed as capital expenditures (CAPEX for short), or "plant, property and equipment." With those two numbers in hand, the equation is simple:
Operating cash flow - capital expenditures = free cash flow
Now, some investors believe that calculating free cash flow by using total capital expenditures paints a distorted picture of the money available for growth because some of those capital expenditures might already be growth assets. In that case, a better figure for calculating free cash flow is called maintenance capital expenditures, which only includes investments in existing plant, property and equipment [source: Basavaraj]. Depending on the detail of the free cash flow statement, however, the two types of expenditures (growth and maintenance) might be difficult to separate.
Lastly, we'll look at some advanced methods for analyzing a company's earnings and cash flow statements.