| One of the best indicators of corporate health is the | | | | even if a company reports positive earnings per |
| Free Cash Flow (FCF) of a company and, unlike some | | | | share. Krispy Kreme is a recent example of this. |
| other indicators, it is relatively easy to understand. | | | | Manipulation of earnings is a frequent problem on Wall |
| Think of FCF as the deposit you put in a savings | | | | Street and FCF can help keep everyone more |
| account after paying your regular monthly bills. If this | | | | honest. |
| deposit keeps increasing, you should feel pretty good | | | | This isn't to say that FCF, itself, is not without |
| about the state of your finances. On the other hand, | | | | problems. If a company refuses to replace aging |
| if your deposit starts shrinking or if you need to dip | | | | equipment, free cash flow can be overstated. Of |
| into your savings account just to tread water, you | | | | course, once the equipment is replaced, cash flow |
| know some serious financial problems may be lurking | | | | may take a violent dive. This, by itself, is a red flag |
| just around the corner. | | | | indicating potential danger. |
| Corporations operate in much the same manner. First, | | | | Some investors like to set up various ratios using |
| like a paycheck, they generate cash from operating | | | | FCF. By dividing free cash flow per share by the |
| the business. This is called Operating Cash Flow | | | | company's current price per share, you'll get a "free |
| (OCF). From this, they subtract their Capital | | | | cash flow yield." This is useful in comparing companies |
| Expenditures. Capital expenditures are expenses for | | | | in the same industry. The higher the yield, the more |
| capital equipment and other physical property, like | | | | favorable the stock. |
| real estate. What's left over is their free cash flow. | | | | Other investors solve for the "price to free cash |
| The FCF can be used for several purposes, including | | | | flow multiple." Here, you divide the share price by the |
| paying a dividend, buying back stock, lowering debt, | | | | free cash flow per share. This is somewhat similar to |
| or saving for future acquisitions. Without FCF, a | | | | the familiar P/E ratio and, like the P/E ratio, you are |
| company will find it hard to grow its business without | | | | looking for lower numbers. |
| issuing new debt or diluting the stock. Except for | | | | If you simply want to skip all this, go to MSN Money |
| start up corporations that will often show negative | | | | on the internet and click on "Stocks.' From there, go |
| cash flow in their beginning years, free cash flow is a | | | | to "Statements" under "Financial Results." Then, go to |
| good indicator of a company's ability to both maintain | | | | the "Cash Flow" statement. At the bottom of the |
| and increase its operations. | | | | page, you'll see that MSN has done a lot of this work |
| Remember, because cash flow analysis puts business | | | | for you. |
| activity on a "cash" basis, it can uncover problems | | | | |