Defining free cash flow

Investment Analysis Clubs Value Hounds
1

There’s lots of ways to define free cash flow. Some common ones…

  • Cash from Operations minus Capital Expenditures

  • Cash from Operations minus Capital Expenditures excluding Maintenance Capex

  • Cash from Operations minus Capital Expenditures minus Preferred Dividends

Here’s how I define it in my work…

Cash from Operations minus Stock Based Compensation (I move this to the Financing Section of the
Cash Flow Statement because it’s a financing not operating decision) minus Investments in Working
Capital minus Investments in Fixed Capital (Tangible and Intangible)

Best to you,
Ears

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2

Sorry, the last section should read as follows:

Here’s how I define it in my work…

Cash from Operations minus Stock Based Compensation (I move Stock Based Compensation to the Financing
Section of the Cash Flow Statement because it’s a financing not operating decision) minus Investments
in Fixed Capital (Tangible and Intangible)

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3

Good stuff, Ears.

I’d add:

  1. Exclude nonrecurring revenue and expenses

  2. Normalize taxes at the statutory rate.

Hewitt

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