Talk:Free cash flow/Archives/2013

interest and prfd dividend expense

Aren't interest payments deducted in the cash flow calculation? If so, it would be redundant to deduct them again in calculating free cash flow. Uucp 19:10, 12 April 2006 (UTC)

No, Free Cash Flow (FCF) does not include items related to leverage. It measures the cash available to all stakeholders - both shareholders and debt holders. - Banchis

From the definition in the article, it is obvious to see that prefer share holders are excluded. In fact, interest expense is already excluded in the first item (cash from operations). Jackzhp 18:14, 25 November 2006 (UTC)

Interest costs should reduce the calc. of Free Cash Flow. I disagree with Banchis - this is a measure for common equity only. They only get what is left after paying interest. Similarly, the dividends to preferred owners must be paid before the common owners get their share. The return to common owners must have these dividends removed.Retail Investor 18:30, 29 November 2006 (UTC)

Alternative definitions

There are several definitions for the free cash flow. And they mean different things:

Free cash flow from the business

= cashs from operation add interest expense (because the cash from operation has already deduct the interest expense) less capital expenditure (because this is a requisite for the business to keep going). This number is meaningful for analysts.

Free cash flow to the firm

from the business less to debtholder and dividend, and add net borrowing.

from operation less capital expenditure and dividend, and add net borrowing

this is the one defined in the article, this number is meaningful for the management. The management use this number to plan the future of the firm.

Free cash flow to the equity holder

from the business less interest expense add net borrowing.

from operation less capital expenditure add net borrowing.

This number is also meaningful for the analysts.

Cash flow to the debtholder

interest expense - net borrowing

If the first two kinds of cash flows will be discounted by WACC, then the interest expense should exclude the tax shield because the WACC has already take the tax shield from interest expense into account.

In many context, people use free cash flow to the firm, or even just free cash flow, although it should be stated as the free cash flow from the business. I hope that this explanation is clear enough to clarify any confusing on the concept of free cash flow.Jackzhp 18:14, 25 November 2006 (UTC)

I don't agree that you can justify any calculation you like by claiming it measures something else. That makes the definition of all metric meaningless. You might as well say..."Calculate what you like to measure what you like and call it what you like". I read all the media, and I have never, ever heard someone catagorizing their Cash flow measure as one of the above.Retail Investor 18:30, 29 November 2006 (UTC)

There are more definitions of "Free Cash Flow" from 'Accounting For Dummies' by John A. Tracy, CPA. —Preceding unsigned comment added by 85.235.18.128 (talk) 23:06, 3 February 2010 (UTC)

Definition used when performing valuation of companies

In investment banking, FCF is defined as EBIAT (EBIT - Taxes) + D&A - Capex - Change in working capital (current assets - current liabilities).

In other words, instead of net income (as stated in this article), EBIAT is used. If you use net income, have you really accounted for debt holders in the company?

See http://www.quickmba.com/finance/free-cash-flow/ —Preceding unsigned comment added by 128.135.215.125 (talk) 18:48, 29 December 2009 (UTC)

Why FCF instead of CF Ops

Out of Curiousity, why does a DCF require the use of unlevered FCFs instead of using CF from Ops?

• Cash flow from operations doesn't count the amount of money that the company is reinvesting in the business. Capital expenditures are important both for maintaining operations (as old equipment needs to be replaced) and for growing the business (opening new stores and factories, etc). Money spent on capital expenditures can't be returned to the shareholder. When calculating discounted cash flows, you want to figure out how much money will be able to be returned to shareholders, so ignoring capital expenditures will cause you to overestimate this amount. See Warren Buffett's explanation in the owner earnings article to see why he thinks emphasizing operating cash flow is an "absurdity". --JHP 01:43, 23 May 2007 (UTC)

Proposed deletion

I have proposed deletion of this article on the grounds that it is based on the unsubstantiated the opinion of the author (i.e. the author(s) have not cross referenced their contributions), but worse than that its content is actually misleading, as the defintion of free cash flow in the article actually conflicts with the information provided in the External links section. Most notably, free cash flow does not include distributions to shareholders. --Gavin Collins 14:18, 11 June 2007 (UTC)

Perhaps the article could be fixed rather than deleting? Why are you suggesting deleting rather than further editing / addition of references?--Gregalton 17:23, 11 June 2007 (UTC)

Gavin, you could edit the article yourself to correct the problems. I don't believe that free cash flow is a GAAP measure, so there probably is no exact definition. I have usually seen FCF defined as operating cash flow minus capital expenditures. --JHP 17:56, 11 June 2007 (UTC)

I don't see any opinion in the article. The article does mention the opinion of why some investors prefer FCF over net income. Just because the original authors didn't cite any sources doesn't mean that the article violates any Wikipedia rules. This article doesn't meet any of the reasons for deletion. I think in order to prevent deletion of the article, someone is supposed to remove the tag at the top of the article and then go through some cumbersome notification process. Personally, I have more important things to do in my life. --JHP 18:15, 11 June 2007 (UTC)

I will try to remove the notice and hope I do the notification right. This is over-using the deletion process.--Gregalton 06:04, 12 June 2007 (UTC)

You are perfectly entitled to do so and I acknowledge your judgement; I will therefore assess the article as a stub rather than pursue deletion further, and move on. --Gavin Collins 13:35, 12 June 2007 (UTC)

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I can't see any reason to delete the entire topic. Instead I would argue what goes on top is the very most commonly understood definition of the term, as it is used in its broadest application. I've added that section. Then, working down the page, people can get into all the alternatives and nuanced applications, accounting and economic theory, etc. The top most portion of the page should well match the very broad use ratio databases that are produced today. They apply a simple formula to standardized financial statement line items. Uses that go beyond that, such as an individual analyst, working on a very specific industry, that's computing his own customized definition of Free Cash Flow, can make notes down on the page for that specific industry. What hits you first should be the broadest application. Likewise accounting theorists can chime in on such scintillating issues as what really is capital, etc.

In the Alternative section, if retained, I suggest using more normalized terms:

Instead of "operating cash flow (OCF)" use "Cash Flow - Operations" (as on the Statement of Cash flows)

Also it looks to me like the math formula is in error - I spent a while trying to figure out what the heck OCB is? I'm pretty sure that author meant OCF or CF-O (cash flow - Operations)

--Rick 20:34, 12 November 2007 (UTC)

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References

I think there might be some misunderstanding here about the difference between References and External links. References are for verifying that the information in the article comes from a reliable source; all information included in the article must be based on a reliable source. External links are usually "a unique resource beyond what the article would contain if it became a Featured article." External links are not references, but I've come across a lot of articles that seem to confuse the two. I don't know if that's the case here, but this article doesn't list any references, so I'm tagging it for references. --SueHay 18:03, 12 June 2007 (UTC)

Depreciation concept

The depreciation concept has been defined in the article as "Depreciation - This should be taken out since this will account for future investment for replacing the current PPE." (fourth last line in th introductory para). However, depreciation concept as per International Accounting Standards is like The systematic allocation of cost of an asset over its useful life.

And in terms of Free Cash flow depreciation is excluded becuase it is a non cash item. Depreciation does not require cash outflow when it is charged to income statement. —Preceding unsigned comment added by 125.209.66.95 (talk) 05:05, 12 August 2009 (UTC)

Levered Free Cash Flow

I was looking at a company, Planar, and noticed that its levered free cash flow is about 20 times its operating cash flow. I couldn't quite figure out how that's possible. Rumamaging around, I haven't been able to find a definition of levered free cash flow that I can understand. Here are the stats: http://finance.yahoo.com/q/ks?s=PLNR The cash flow info is at the bottom. Rummaging around brought me to this article, which I have to say confused me more.

Capex

There seems to be a switch midway through this article as to whether "capex" as used to calculate FCF is total capex or only the part of capex necessary to maintain asset levels (the (c) in Buffet's Owner earnings). Am I mistaken in my view of this as inconsistent? —Preceding unsigned comment added by Serdagger (talk • contribs) 20:55, 15 March 2010 (UTC)