Free Cash Flow explained
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- Опубликовано: 30 июл 2024
- What is Free Cash Flow (FCF) and how do I calculate it? What is Free Cash Flow used for? What is the mearning of Free Cash Flow? What is the Free Cash Flow performance of Exxon Mobil, Facebook, General Electric and General Motors ? This Finance Storyteller video provides an in depth look at common and alternative definitions of Free Cash Flow (FCF), compares the profit view and the cash flow view of looking at a company’s performance, and analyzes the Free Cash Flow numbers published by Exxon Mobil, Facebook, General Electric and General Motors.
⏱️TIMESTAMPS⏱️
00:00 Introduction to Free Cash Flow
00:56 Free Cash Flow in the financial statements
01:25 Free Cash Flow definition
02:05 Free Cash Flow calculation
03:54 Free Cash Flow example
05:06 Profit vs Free Cash Flow
07:04 Free Cash Flow comparison between companies
10:25 Free Cash Flow and valuation
11:46 Free Cash Flow summary
Free Cash Flow is usually defined as:
Cash flow not required for operations or reinvestment
Cash flow available for distribution among all the securities holders (debt or equity) of an organization
Calculation: Cash From Operating Activities (CFOA) minus Capital Expenditures
Unfortunately, the Free Cash Flow definitions that companies use are not always the same. Some stay very close to what you see here, but we will also see some alternative definitions along the way in this video.
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Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: RUclips videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
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Enjoyed the video? Then please subscribe to my channel, and watch the follow-up video on how to go from revenue to profit to free cash flow in a business plan: ruclips.net/video/FC0ZODWFzpo/видео.html
Really just one of the best finance RUclips channels out there. Crystal clear explanations and real-world examples.
Thank you very much, Omri! I am so happy to hear that. Please tell your friends and colleagues about the channel! :-) I recently made a follow-up video with a Netflix free cash flow case study that you might like as well: ruclips.net/video/ikizI8dX1SA/видео.html
Just started studying for My CFA and this video helped me with understanding conceptually what FCF is.
Thanks...Great Video
Hello Bina! Thank you, it's very nice to hear that. Happy to help! The explanation in this video is the more technical/accounting one, whereas in my video on business plan financials I have approached Free Cash Flow more from the entrepreneurship side: ruclips.net/video/FC0ZODWFzpo/видео.html
I am fortunate to have discovered finance story teller videos . Thank you for explaining with clarity.
That is wonderful to hear, Vijay! Thank you very much.
Superb video in all apsects: pleasant voice, clear explanations supported with examples from the real world.
Thank you very much!!! Enjoy the Finance Storyteller channel, and please spread the word. :-)
Thank you that helped a lot, especially when you showed the tables and the metaphors and examples are great! Thanks.
Thank you very much for the kind words! I have a few more videos around cash balance and cash flow that might be useful for you. Most notably my recent video on understanding the cash flow statement, built around Shell's numbers. ruclips.net/video/mZBjsIYrLvM/видео.html
Hello, thank you so much for the video. Your videos are my first-choice when i dont get an accounting term. You explain it so well. Keep helping everyone! :D
Thank you very much for the kind words!!! Nice to hear the videos are helpful. I am working on several new ones, to be released soon!
Great video. Very clearly explained in a reasonable amount of time. Much appreciated!!
Thank you, Cliff! I have made some follow-up videos, approaching Free Cash Flow from different angles ruclips.net/video/FC0ZODWFzpo/видео.html&pp=gAQBiAQB and I am currently working on a video on DCF (Discounted Cash Flow) which includes a FCF analysis of Verizon.
Really love your video! You explain key concept very clear with real life example! It's really great!
Thanks so much! 😎 Here are some more cash flow related examples: ruclips.net/video/YiU_DXlLZ4s/видео.html
Excellent video, short but to the point!
Thank you very much, Axel! Here's the follow-up case study on the trends in free cash flow of Netflix: ruclips.net/video/ikizI8dX1SA/видео.html
AMAZING explanation. Thanks !
You're welcome, Yosi! I have many more videos related to cash flow on my channel: ruclips.net/video/mZBjsIYrLvM/видео.html Enjoy!
Thank you for doing this, you're helping people more than you know. Godbless you more.
Very happy to help! I enjoy researching and making the videos, and it's nice to see that they are finding a bigger and bigger audience.
One of the best explanations i have heard
Thanks for the kind words!!!! Compliments like this keep me going to make new videos.
Thanks for the video. Actually we discussed the same topic today during a training for non finance employees. I will forward the link to them for reference.
You're welcome! Please share. :-)
Muito Obrigado. Aula bastante clara e objectiva!
Obrigada, Jaime!!!
Very helpful, thank you for this!
You're very welcome! As a follow-up, here's a case study of the free cash flow of Netflix from a few years ago: ruclips.net/video/ikizI8dX1SA/видео.html and a discussion of how free cash flow links to revenue and profitability ruclips.net/video/FC0ZODWFzpo/видео.html
very informative explained in the easiest of ways.....kudos, keep it up
Thank you so much for the kind words, Shailendra!!! More (free) cash flow related videos (including case studies) in this playlist: ruclips.net/video/ikizI8dX1SA/видео.html
Thank you for this!
My pleasure, Sara! More on free cash flow in this example ruclips.net/video/FC0ZODWFzpo/видео.html and this real life case study ruclips.net/video/ikizI8dX1SA/видео.html
Love your videos man thanks. By the way any stock market investor should compare balance sheet and cash flow statement, in order for them to know the effectiveness of management.
Thank you! I agree. Take a look at my follow-up video as well, covering trends in the revenue, profitability and free cash flow of Netflix: ruclips.net/video/ikizI8dX1SA/видео.html
Excellent explanation. Thanks
Glad it was helpful! I have put together another example of how this works for a small business: ruclips.net/video/FC0ZODWFzpo/видео.html which might be helpful to you too.
Amazing videos!
Thank you!!! Please subscribe to the channel, and spread the word!
That was one good explanation!
Glad you liked it! Have a look at the "free cash flow in the business plan" video as well, it could b helpful: ruclips.net/video/FC0ZODWFzpo/видео.html
Thank you
Happy to help!
easy to understand
Good to hear! That's exactly what I was aiming for.
thank you
Happy to help, Imane!
Yes love it
Wonderful! Thank you for watching and commenting.
Awesome
Thank you! I agree! ;-)
I realize i am a little late but where you say you purchase raw materials from a supplier and pay for it, at 5:52, did you mean to say "you book a credit to inventory and a debit to cash"? I am new to finance. Thanks
Hi Adwoa! What I said is "If we purchase raw material and pay the supplier for it, we book a debit to inventory and a credit to cash", which is the correct way of looking at it. The natural state for an asset account is to have a debit balance. Asset accounts increase by recording more debits to it, and decrease by recording credits to it. So if inventory goes up, I need to debit the inventory account. If cash goes down, I need to credit the cash account. For more explanation and a visualization using T accounts, see my video on debits and credits ADE LER ruclips.net/video/b93KBmcXanI/видео.html
I found this video very informative. I have been having problems grasping finance during my degree (remote learning) can you offer me any tutoring?
Thank you, Thomas! I don't offer tutoring, but I think you can learn a lot from my main playlists:
Finance for beginners ruclips.net/video/iR7b2NjgAO8/видео.html
Accounting 101 ruclips.net/video/OYql7Y9NnBg/видео.html
Finance case studies ruclips.net/video/PI9X5Ybek_E/видео.html
First of all, thanks for the great video, both this one and the rest of the channel, great work, I wanted to comment a doubt if you can attend it, about the calculation of FCF of Facebook, I see that only use the investment capex, but not the maintenance capex, should not you contemplate it in the calculation of the FCF? When I say maintenance capex, I mean the necessary expense to keep the business running (maintenance of equipment and applications, guarantees, licenses, etc.) thanks in advance, regards
Hello again, Nicolas! Let's see if my CapEx versus OpEx video answers your question. In my view, upgrades to equipment could be classified as CapEx, but "pure maintenance" to keep it running is OpEx. ruclips.net/video/na4jbAh_vkQ/видео.html
Great explanation. I have got a stupid doubt though.
When a company decides to pay dividends, does the FCF decrease?
Free Cash Flow is usually defined as:
Cash flow not required for operations or reinvestment
Cash flow available for distribution among all the securities holders (debt or equity) of an organization
Calculation: Cash From Operating Activities (CFOA) minus Capital Expenditures
So you pay dividends, or buy back shares, or pay off loans, from the FCF that you generate.
I know the basics about cash flow definition and want to learn more. What book do you recommend me? Thanks!
Hello Martin! I would recommend studying actual cash flow statements of actual companies you are interested in! Start from "real life", and then look at books and other resources for explanations. As a start, here is the link to my analysis of the Alphabet Inc (Google) cash flow statement ruclips.net/video/koOdj6wRJ9M/видео.html and my analysis of Netflix free cash flow 2015-2019 ruclips.net/video/ikizI8dX1SA/видео.html
Great stuff man! Explained very clearly. Good for investing principles. May I ask what can I get from the members area?
Thank you! I have made two more Free Cash Flow videos (one about FCF in a business plan, one with a Netflix FCF case study) that I think you will enjoy: ruclips.net/video/FC0ZODWFzpo/видео.html Press the blue "Join" button on my channel for a full description of the membership levels and rewards: bonus videos, livestream webinars. I did a livestream recently on 2020Q1 Uber Technologies financial results ruclips.net/video/87Ag_hhseOA/видео.html (available to all) and have done members-only webinars on 2020Q1 Netflix/P&G, and Facebook/Apple.
@@TheFinanceStoryteller thank you! I will sign up I think. Will check the Netflix fcf video! would be cool to see how you analyze on a cannabis company n tear them apart on bad earnings.
@@TheFinanceStoryteller also is thr subscription to your members area cancellable any time? I want to check it out and see if I like it to stay but not sure if I wanna pay for months at a time.
Yes, memberships are cancellable, but I hope you like it and stay around. :-)
@@TheFinanceStoryteller thank you! You definitely made me understand the three financial statements much more clearer than any other RUclips channel. The famous saying is to explain it like to a 5 year old, and you hit the nail in the park!
*This is good teaching. Nice graphics.* _TᕼᗩᑎK YOᑌ._
*Update▶A question. If CFOA = 0 and CAPEX = 1 million$. How much is FCF ?*
Thank you for watching! I think Free Cash Flow is a very important concept to understand. I have a lot more videos on my channel around cash flow organized in this playlist: ruclips.net/video/mZBjsIYrLvM/видео.html
Sounds like the GM of Shell!
That could be related to Mr Van Beurden and myself having the same nationality. ;-) By the way, I have a discussion of Shell's cash flow in a related video: ruclips.net/video/mZBjsIYrLvM/видео.html
CFOA - CAPEX is your formula... but what about interests included in Net Income when CFOA is calculate it?... I think that you should addback interest ... I think that the right formula should be write it as follows...CFOA - CAPEX + INTEREST (1-TAX) for having the real FCFF.... what do you think?...
Ebit+ interest (1-tax rate)-capex-change in wc if addition
Hi FST, thanks or the video, do you have a Video on DCF ?
Hi Craig! I cover DCF as part of my WACC video: ruclips.net/video/1O-DbtVueMw/видео.html
@@TheFinanceStoryteller thanks very much I will watch
I opt commerce with IP in my high school
What if a company has a net loss but still has free cash flow? What would that actually mean? I'm thinking of Roblox for instance. Their most recent financial statements show a net loss AND positive free cash flow.
Hello! Thanks for the tip, this is a very interesting question. I just took a look at the Q1 2021 earnings release by Roblox. They indeed published a net loss in the income statement, and positive CFOA and FCF in the cash flow statement. The difference is largely explained by one of the items in "change in working capital": the change (increase) in deferred revenue on the balance sheet. If users prepay for a subscription, then you recognize the full amount of cash coming in immediately, but defer the revenue (and related margin) over the various periods of the subscription. Take a look at my video on deferred revenue ruclips.net/video/SNguYyKrqL4/видео.html and the one on CFOA (cash from operating activities) ruclips.net/video/srE4XZRtHzk/видео.html to learn more. Hope this helps!
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Dear @The Finance Storyteller , Is Opex part of CFOA . Are they same thing pls ?
Opex = Operating Expenses = R&D + SG&A. These are part of the income statement, with net income being the final number. See my video "income statement explained": ruclips.net/video/Hq-44PHgAiU/видео.html CFOA is Cash From Operating Activities. In the indirect format of cash flow reporting, CFOA is calculated by taking net income and adjusting for changes in working capital and non-cash items. So, in short, yes Opex is part of the CFOA calculation, and no, they are not the same things. See also: ruclips.net/video/srE4XZRtHzk/видео.html
What does "Adjusted Free Cash Flow" mean?
Hello Brian! I have seen this used by companies when they take out unusuals/non-operational items in their Free Cash Flow reporting, such as (but not limited to):
Restructuring and restructuring-related payments
Acquisition-related payments
Special tax payments (refunds/credits)
Certain litigation-related settlements
You could also call it "Free Cash Flow Before Bad News" 😉
So if a company has a cross holding. Let's say Berkshire Hathaway owns 5% of apple and 60% of another company. Does 5% of apples fcf get added to brk fcf on the income statement? Or only when you own majority of the company? 50%+
I have never been through the Berkshire Hathaway financial statements, that would be the place to find the answer. For 5% shareholdings, equity accounting would be in place, meaning you just record your proportionate part of the earnings, and any dividends received from them. For companies where Berkshire Hathaway has a majority ownership, the key question is whether it has "control" or not, and would therefore consolidate the results or not: ruclips.net/video/DTFD912ZJQg/видео.html
Is Free Cash Flow the same as Retained Earnings?
Hi George! They are not the same thing, but deal with somewhat related topics.
Free Cash Flow is the part of cash flow that is available for distribution among all the securities holders (debt or equity) of an organization. In other words, that part of the cash flow you could take out of the company (to pay down debt, or pay a dividend to shareholders) without hurting its ongoing operational capability to pay the bills, and without hurting the investment plan. To calculate Free Cash Flow, you take the most comparable GAAP metric Cash From Operating Activities (or CFOA) and deduct Capital Expenditures. Here's a case study on Free Cash Flow of Netflix: ruclips.net/video/ikizI8dX1SA/видео.html
Retained earnings (on the balance sheet) is that part of a company’s cumulative historical profits that has not been distributed to shareholders through a dividend. Here's the link to my video covering retained earnings: ruclips.net/video/xiwQh5E7JWQ/видео.html
So essentially, a company first needs to generate a positive free cash flow, and then decide how much dividend (if any) they pay out to shareholders. The higher the dividend, the lower the (increase in) retained earnings.
NEDERLAND
Jazeker!
I always deduct loan repayments in the year as these have to be paid and thus cannot be classed as free cash.
Free cash flow is a non-GAAP metric, so you are free to define it as you please! ;-) To counter your argument, I would say that loan repayments can be refinanced at the time of expiration of the loan, which would make the "net" repayment for cash flow purposes zero.
@@TheFinanceStoryteller Yes, loan repayments can be re-financed but surely both capex can be deferred too. To my mind, loan repayments are an obligation, no different from paying suppliers.