Interested in stock investing? If you answered yes and were asked what factors you would examine while investing in stocks, the most typical responses would surely be financial performance, return and valuation ratios, among others. Price-to-earnings (PE) and price-to-book value (PB) ratios are two valuation factors that any investor may consider. While they both reflect current earning potential, neither of these valuation metrics indicates future prospects. And here is where 'free cash flow' is important! Free cash flow takes into account the company's earnings as well as historical (depreciation) and present capital expenditures, capital inflows and working capital investments.
The following story will help you in comprehending the concept of free cash flows, its method of calculation, the benefits it brings for the company, as well as why it is crucial for investors to take these into account. We will also focus on the top companies that have consistently generated free cash flow year-on-year, demonstrating excellent growth. Let's start by understanding the concept. The cash a company has, after taking into account the cash payouts required to run its operations and to sustain its capital assets, is known as free cash flow (FCF).
A portion of a company's cash flow can be withdrawn and given to creditors and investors without having an adverse effect on operations. The more the free cash flows, the better for the company. It represents the surplus cash that is readily available for value generation, expansion and rewarding stakeholders. The capability of a company to make a healthy profit serves as an asset for presenting an optimistic perspective to its stakeholders. And hence, while evaluating a business's sustainability and growth potential, analysts and stakeholders always assess the company's free cash flow position.
Calculating the Free Cash Flow
This story is from the {{IssueName}} edition of {{MagazineName}}.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.
Already a subscriber ? Sign In
This story is from the {{IssueName}} edition of {{MagazineName}}.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.
Already a subscriber? Sign In
How To Invest In An Ageing Bull Market
Bull rallies (periods when stock prices rise) and bear declines (periods when stock prices fall) are natural parts of stock market cycles, but they don't follow a fixed timeline.
Should You Entrust All Your Money To A Single AMC?
If you are a market participant, you have probably heard the quote 'don't put all your eggs in one basket', which suggests diversification. Investors often focus on diversifying across categories like large-cap, mid-cap and small-cap, but they may unintentionally overlook diversification across different AMCs. The question arises: is AMC-wise diversification really necessary? Rakesh Deshmukh takes a closer look at this scenario
Wild Swings Engulf Global Equities
U.S. stock markets experienced significant volatility. An early-week rally pushed the markets to new highs, but this momentum faded, primarily due to weaknesses in the tech sector. The major indices had a mixed finish with, S&P 500 and Nasdaq closed lower, while the Dow recorded a notable gain.
U.S. Elections and China's Economy Hamper Commodities
Commodity markets experienced selling pressure in the last fortnight, driven by uncertainties surrounding the upcoming U.S. presidential elections, concerns about the Chinese economy, and increased agricultural production in Brazil.
Wealth Building For Retirement Through Mutual Funds
Retirement is one of the most crucial and lifechanging phases. It marks a period where maintaining your lifestyle becomes paramount even though your regular income stops.
Mastering Investment with Information Ratio
Information Ratio helps in navigating the complexities of the investment landscape by assessing an active fund manager's performance. And though it has its limitations, it remains an essential part of the finance industry. The article explains what Information Ratio is and how investors can use it as another tool
Plan To Be Financially Independent
Each of us aspires to be financially independent as it ensures having enough resources to be self-sufficient and control our finances.
❝Technology is the new game-changer"
With a new breed of young investors entering the financial markets, it is the use of technology that is increasingly playing a major role in how investments are done and tracked. Anand Radhakrishnan, Managing Director, Sundaram Mutual Fund, shares his opinion about how this factor is turning into a significant tool and how it will shape the strategies of his company
What If Donald Trumps?
The potential election of Donald Trump as president in the U.S. carries significant implications for the Indian equity market. It could lead to changes in the global trade dynamics, in particular affecting the Indian IT sector while also raising inflation levels and leading to yet another revision in the visa programme for Indians who want to work in the US. The article takes a closer look at what may lie in store
Sectoral Gains Make A Mark
Benchmark indices continued their uptrend, reaching new record highs, although the pace has slowed as the broader markets faced selling pressures
