Essay on Free Cash Flow Measures A Company 's Financial Health

Essay on Free Cash Flow Measures A Company 's Financial Health

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Free cash flow measures a company’s financial health. This is determined by calculating operating cash flow minus capital expenditures. This only represents the cash that a firm is able to make after spending all required monies needed to keep or expand an asset base. Also known as a non-GAPP financial measure. Earnings before interest, tax, depreciation, and amortization or EBITJDA is minus net cash interest expense, non-discretionary cash capital expenditures and cash taxes paid.

The dividend discount model could have used to be employed to show a company’s value or valuation. This model could be used only if a company pays any dividends. This is the end result that is left over from a firm’s expenses, debt, reinvestment, and any other incidentals are paid that can be paid to the equity shareholders of a company.

Cash inflow is based on any combination of financing, operations, or investment. The FCF is there to be used by a business to jump on any opportunities to make the stakeholders value increase. FCF is good for validation of a company.

Equity Free Cash Flow (EFCF) In a formula form it can be calculated EFCF = Net Income – Net Capital Expenditure – Net Working Capital + New Debt – Debt Repayment.
By using another formula Equity FCF = Firm FCF –(Interest expense – Interest Tax Savings + Principal payments – New Debt Issue Proceeds), we can see that FCF is directly involved in calculating EFCF’s value.

There is a way to indirectly calculate a firm’s free cash flow by focusing on how the business cash gets to the appropriate investors, and creditors. This could also gain insight on to how a company represents its FCF.

By using the wrong measure for dividend returns, a firm could be not giving enough back to the...

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...rm. Each time a choice is made about these expenses can have a detrimental effect on the potential for profit from these cut areas. For example, cutting R&D could make the firm unable to compete in the advancements that could have easily been discovered if the budgets were not slashed. Without advertising, the market share for the firm could slip down while another business takes over with viral campaigns, and attack based tactics to get them into the spotlight.

Personally, I feel like this might be a trick question, with moral repercussions for failing to honestly report debts, credits, assets, and other items. Creative accounting is not morally ethical ever. Just report everything, every debt, credit, expenses, all of it. The price one might pay is that it might mean your job, but I would sleep better at night since I could say that I didn’t “cook the books”.

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