Free Cash Flow: A Simple Indicator Of A Company’s Health

There are many ways to dissect and collect the data. Hopefully, you have made this a part of your regular monthly data collection and analysis process. If you haven’t done it yet, you need to start.

Think of FCF as the deposit you put in a savings account after paying your regular monthly bills. If this deposit keeps increasing, you should feel pretty good about the state of your finances. On the other hand, if your deposit starts shrinking or if you need to dip into your savings account just to tread water, you know some serious financial problems may be lurking just around the corner.

We all know that customers that don’t pay are simply taking money from your pocket and putting it into their own bank account. The best is to have no credit policy, and even collect cash in advance.

Analyze your property, the type of neighborhood in which it is located, and what businesses or organizations are nearby. Would this property be suited for young professionals with no families? Would this property be better suited for renovation and resell to a family? Knowing what you are buying will help you better turn a profit on your property.

Dow Chemical Co. (DOW). As one of the largest owner of chemical plants, Dow would take a long time to depreciate its long term assets, right? Wrong. For fiscal year 2005, Dow incurred a depreciation cost of $ 2.08 Billion. Meanwhile, its total depreciable long term assets are at $ 17.1 Billion. This gives it a ‘mere’ 8.2 years to depreciate all its assets. Dow assumes that the plant lifetime is around 8.2 years. This implies that even if Dow plant is still running ten years from now, it has already been expensed for and Dow can regard the plant cost as ‘free’.

As an investor, it is important to see how the company uses their cash. You should be able to accomplish this by delving into the cash flow examples. You will be able to gain some insight into the management’s strategy and the future of the company. Is the company spending money on globalization or focusing on a new brand of product? A red flag should go up when you see the company borrowing too much because it could force them to use their cash to pay the interest rather than using it more productively.

Total depreciable long term assets stood at $ 87.2 Billion in December 2005. At current pace, Comcast will finish depreciating its long term assets eighteen years from now! This assumes no new capital expenditure. The cold hard truth is that the companies spend $ 3.62 Billion of capital expenditure during the same period.

When calculating P&L, one needs to ensure they are doing it in correspondence with the fiscal year. The fiscal year for a P&L is not determined by a calendar year, or by the lease year, but it can be. However, doing the P&L by the latter usually results in misleading information. Another element to consider is Capital. If a cost is capitalized then the amount is depreciated and spread over a period of time instead of being reflected on the P&L of the first fiscal year. In this way the P&L can, often times, reflect a lower cost for the year than the Cash Flow.