How to parse the financial report and find the bull stock?

Views 55K Oct 16, 2024
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Why is free cash flow so important?

Amazon founder Bezos (Jeff Bezos) once said that the measure of a company's financial indicators is free cash flow.

Free cash flow refers to the cash that a company can freely allocate.

There are many methods to calculate free cash flow, with one of the most common being to subtract capital expenditures from operating cash flow.

Operating cash flow refers to the cash earned by the company through its main business operations.

It tells investors whether a company has enough cash to pay for daily operating expenses, such as buying raw materials, paying salaries, bills, etc.

Capital expenditure can be understood as an expenditure that a company invests in for future growth, such as purchasing offices and equipment.

In other words, free cash flow is the cash remaining after a company has paid for operating expenses and capital expenditures.

Free cash flow may be one of the most closely watched financial indicators by investors.

It measures whether a company has excess cash to repay debt and reward shareholders.

If the free cash flow is positive, it means the company has excess cash for dividends, share buybacks, and debt repayment.

On the contrary, if a company's free cash flow is negative, it indicates that the money earned from operation is not enough to cover operating expenses and capital expenditures.

At this point, the company not only lacks extra cash to reward shareholders but also needs external fundraising to solve short-term funding issues.

So, how much free cash flow is considered appropriate for a company?

Generally, the higher the free cash flow, the better, as it indicates that the company has excess cash to reward shareholders and grow the business, which is a good thing for investors.

However, it is worth noting that excessively high free cash flow is not always a good thing, as it may indicate inadequate investment and business development.

In addition, companies in different industries have varying operational situations.

For example, the capital expenditures of oil & gas companies are generally higher than those of other industries, because they need to invest significant capital in the early stages to purchase fixed assets, such as drilling equipment.

As a result, the free cash flow of oil & gas companies becomes very unstable.

Therefore, some investors tend to analyze the trend of free cash flow to observe the financial health of the company.

If a company's free cash flow has been steadily increasing over the past few years, it may indicate that the company's financial condition is relatively healthy.

On the contrary, if a company's free cash flow continues to decline, investors need to pay attention and further analyze the reasons for the decrease in free cash flow.

In general, free cash flow is the cash that a company can use freely.

This is an important financial indicator in earnings reports that investors can use to analyze the financial health of the company.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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