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about finding Free cash flow
01-25-2009, 03:36 PM
Post: #1
about finding Free cash flow
In an annual report, there is a part called
Condensed Consolidated Cash Flow Statement

And there is a line

Cash and Cash equivalent at the end of the period.

is that the same as Free Cash flow?

http//www.pc.ibm.com/ww/lenovo/pdf/FY2007-08_Interim_Report_E_Final_1113.pdf
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01-26-2009, 04:30 PM
Post: #2
 
Dear,

The cash flow statement given in interim condensed accounts and the figure of cash and cash equivalents given at the end of such statement may not be quite relevant to know the free cash flows when you are focusing on the valuation of some business on the basis of discounted cash flow estimations.

In such valuations, future cash flows are ascertained in a very broad concept, by converting the net income/profit into cash through adding back or netting off the depreciation and amortization and other major non cash items. It’s basically the future projection for 10 or 20 years with (or without) some estimate of terminal values, if such termination is expected. When you will adjust the net profits to the cash figures by adjusting for the non cash items, you will supposedly get the future cash flows for discounting purpose at a given discount rate in order to calculate the present values for each period.

Now if you will adjust the above cash flows or (operating cash flows) for estimated future capital expenditures {that you plan to incur as part of your future financial projections for maintaining or enhancing the production or earning capacities} you will get the free cash flow figures. Free cash flow is defined as

“A measure of financial performance calculated as operating cash flow minus capital expenditures.”

A website speaks about Free cash flow as under

QUOTE

Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.


It is calculated as

Net Income
+Amortization/Depreciation
-Changes in Working Capital
-Capital expenditures
=Free cash flows

It can also be calculated by taking operating cash flow and subtracting capital expenditures

Earnings can often be clouded by accounting gimmicks, but it's tougher to fake cash flow. For this reason, some investors believe that free cash flow gives a much clearer view of the ability to generate cash (and thus profits). It is important to note that negative free cash flow is not bad in itself. If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.

UNQUOTE

For further clarity, you may visit following link.

http//en.wikipedia.org/wiki/Free_cash_flow

I hope you will be benefited.

Regards,


KAMRAN.
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