Question

What are free cash flows? Explain the difference between the company’s operating cash flow and it’s free cash flow.

Describe the key features of the free cash flow approach to valuation.

Answer 1

Free cash flows is a measure of financial performance of the entity and is calculated as net income plus depreciation and amortisation expense less change in working capital ( current assets - current liabilities) less capital expenditure.

Operating cash flow is alike free cash flow except it does not exclude capital expenditure.Both are useful in making comparisons amongst industries and assists in calculating financial ratios. Higher the operating and free cash flow, higher the appreciation in value of shares of the company.