Free cash flow (FCF) is calculated as the difference between operating profits generated by a company for the year and the amount reinvested back into the business through: (a) investments in working capital; and (b) investments in fixed and intangible assets. Every firm typically goes through four stages in its lifecycle: nascent, growth, maturity and decline see chart 'Free-cash-flow lifecycle of a typical company'. The interplay of key determinants of FCF, i.e., operating profits, reinvestments and thus the quantum of FCF generation is significantly influenced by the stage of a company's lifecycle as shown in the chart.
While FCF is generally non-existent during the nascent phase (due to a lack of operating profits and heavy reinvestment needs), it starts building up as the operating profits start growing (growth phase). Then, after an inflection point when operating profits become sizeable enough to more than meet the reinvestment needs, there is an onset of the exponential FCF compounding phase.
While from this chart, it may seem a natural progression for every company to move up the free-cash-flow curve, in reality only a small subset of the companies at the beginning of each phase, irrespective of the longevity of their operations, graduates to the next higher phase of the free-cash-flow cycle. In fact, a large number of companies which have had operations for years or even decades are unable to generate operating profits and generate positive free cash flows due to a variety of reasons, including the lack of competitive advantages. At the same time, we have seen several instances of companies which are able to grow operating profits but continue to find FCF elusive. Such companies are typically in capital-intensive, low-margin sectors. In such companies, the high reinvestment in capex and working-capital days is a must for growth and these continue eating away at operating profits, resulting in low or no FCF.
Diese Geschichte stammt aus der March 2022-Ausgabe von Wealth Insight.
Starten Sie Ihre 7-tägige kostenlose Testversion von Magzter GOLD, um auf Tausende kuratierte Premium-Storys sowie über 8.000 Zeitschriften und Zeitungen zuzugreifen.
Bereits Abonnent ? Anmelden
Diese Geschichte stammt aus der March 2022-Ausgabe von Wealth Insight.
Starten Sie Ihre 7-tägige kostenlose Testversion von Magzter GOLD, um auf Tausende kuratierte Premium-Storys sowie über 8.000 Zeitschriften und Zeitungen zuzugreifen.
Bereits Abonnent? Anmelden
Bad ideas, F&O trading and the market
Find out the mindset required to find success in F&O trading
Licence Raj Redux?
The import policy changes might take us back to the days of License Raj
How to do magic
Getting great equity returns sustainably only looks like magic, it actually isn't
Data protection and cyber security
The increasing need for cyber security is opening up investment opportunities
"Buying is dependent on pricing but not on timing"
Insights of a fund manager at PPFAS Mutual Fund
Pro vs Amateur
Can amateur stock investors be better than pros? Yes! Here's how
The dimming of Brightcom
Shedding light on irregularities at the Brightcom Group
First tryst with profitability
Find out if food aggregators have found a cure to their loss-making curse
Have We Crossed The Peak Of Inflation?
Find out if the present macro scenario calls for tweaking your portfolio strategy
Tomatonomics
The humour, the stories and what could have been done about tomato inflation