How to Calculate Free Cash Flow

Free cash flow is an excellent way to measure a company's profitability and a key factor for investors who want to see big cash dividends.

Instructions

  • Step 1: Track how the company spends this cash. A company that provides regular cash dividends ensures that you'll get a tangible return on your investment and have the option to reinvest or take your money to the bank.
  • FACT: Ultra-wealthy investor Warren Buffet, known as the "Oracle of Omaha," has consistently sought to invest in companies with significant free cash flow.
  • TIP: Negative free cash flow is not necessarily an indication of a bad company, since many new companies put a lot of their cash into investments, diminishing free cash flow.
  • Step 2: Analyze the free cash flows over a period of four to five years to see how well the firm has been performing.
  • Step 3: Locate the capital expenditures amount, also listed in dollars.
  • Step 4: Subtract capital expenditures from cash flow from operations to find the FCF, or free cash flow.
  • Step 5: Find the line that says "cash flow from operations" in the company's financial statement, like their annual report, 10-Q, or 10-K filing, and note the dollar amount.

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