Essentially, the key point of difference between the two metrics is the fact that free cash flow and operating cash flow are a measure of different things. Free cash flow refers to the money that your business generates from its core business activities, after subtracting capital expenditures (i.e. long-term fixed assets like equipment or real estate). In other words, you can think of free cash flow as the amount of cash that your business has left over after accounting for cash outflows that help to expand your assets and support ongoing operations.

A negative free cash flow would mean the company isn’t generating enough from its operating activities to fund its capital expenditures, nonetheless return capital to its investors. The P/E ratio measures how much annual net income is available per common share. However, the cash flow statement is a better measure of the performance of a company than the income statement. This free cash flow figure is considered to be excess cash flow that the company can use as it deems most beneficial. With strong free cash flow, debt can be retired, new products developed, stock can be repurchased and dividend payments can be increased.

• The smaller the difference between LACFY and the Treasury yield, the less desirable an investment is.
• The main distinction between indirect and direct techniques is the estimation of operating activities or exercises.
• Earnings, dividends and asset values may be important factors, but it is ultimately a company’s ability to generate cash that fuels the growth in these factors.
• Investors that bought Tesla previously should not sell into the weakness, in my opinion.
• Tesla generated $848M in free cash flow in Q3 ’23, showing a drop of 74% Y/Y, largely due to soaring capital expenditures…
• Operating Cash Flow (or sometimes called “cash from operations”) is a measure of cash generated (or consumed) by a business from its normal operating activities.

We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Profit is typically defined as the balance that remains when all of a business’s operating expenses are subtracted from its revenues. It’s what’s left when the books are balanced and expenses are subtracted from proceeds. Positive cash flow means a company has more money moving into it than out of it. Negative cash flow indicates a company has more money moving out of it than into it.

Cash flow is the net amount of cash that an entity receives and disburses during a period of time. Bankers can consider FCF as a measure of the company’s ability to take on additional debt. If a company has enough FCF to maintain its current operations but not enough FCF to invest in growing its business, that company might eventually fall behind its competitors.

The top line of the cash flow statement begins with net income or profit for the period, which is carried over from the income statement. If you recall, revenue sits at the top of the income statement; after all expenses and costs are subtracted, net income is the result and sits at the bottom of the income statement. The locations are why revenue is often called the top-line number, while net income or profit is called the bottom line number. Unearned revenue can be thought of as the opposite of accrued revenue, in that unearned revenue accounts for money prepaid by a customer for goods or services that have yet to be delivered.

#2 Cash Flow (from Operations, levered)

While these are non-cash expenses, they reduce a company’s taxable income and are added back to calculate OCF. You can think of Operating Cash Flow as a way to check how well a company is doing financially and how much money it gets from its regular business operations. While both offer insights into a company’s cash flow dynamics, they serve distinct purposes and reveal different facets of its financial operations. One important concept from technical analysts is to focus on the trend over time of fundamental performance rather than the absolute values of FCF, earnings, or revenue.

Further, free cash flow is a major component of a discounted cash flow (DCF) method of valuating a business as an investment prospect. If your net cash flow is positive, the business ended with more cash than it started with, and vice versa if the cash flow is negative. Combining each of these values gives you the total net cash flow for the business during the period.

Free cash flow is the net change in cash generated by the operations of a business during a reporting period, minus cash outlays for working capital, capital expenditures, and dividends during the same period. In other words, free cash flow helps investors determine how well a company generates cash from operations but also how much cash is impacted by capital expenditures. Free cash flow can be envisioned as cash left after the financing of projects to maintain or expand the asset base. Tesla’s capital expenditures have increased in the long term and occasionally spiked (when Tesla expanded production for new EV models).

Cash flow management is different for every business

The downside is that most financial models are built on an un-levered (Enterprise Value) basis so it needs some further analysis. Free Cash Flow can be easily derived from the statement of cash flows by taking operating cash flow and deducting capital expenditures. Operating Cash Flow (or sometimes called “cash from operations”) is a measure of cash generated (or consumed) by a business from its normal operating activities. EBITDA can be easily calculated off the income statement (unless depreciation and amortization are not shown as a line item, in which case it can be found on the cash flow statement). As our infographic shows, simply start at Net Income then add back Taxes, Interest, Depreciation & Amortization and you’ve arrived at EBITDA.

AccountingTools

Operating cash flow indicates whether a company can generate enough cash flow to maintain and expand operations, but it can also indicate when a company may need external financing for capital expansion. Free cash flow (FCF) is the cash a company produces through its operations after subtracting any outlays of cash for investment in fixed assets like property, plant, and equipment. In other words, free cash flow or FCF is the cash left over after a company has paid its operating expenses and capital expenditures. Put differently, the free cash flow figure shows how much money is left for investors after the company takes care of its operations, but before they make dividend payments, debt payments, or share repurchases. Revenue can be broken down and listed as separate line items on a company’s income statement based on the type of revenue.

Unearned Revenue

Free cash flow represents the cash flow that is available to all investors before cash is paid out to make debt payments, dividends, or share repurchases. By analyzing both cash flow and free cash flow, we can see how much a company generates from its normal course of operations, what they’re investing in, and how much debt they’re paying down or taking on. As a result, investors can make a more informed decision as to the financial viability of the company and its ability to pay dividends or repurchase shares in the upcoming quarters. In the above example, total cash flow was less than free cash flow partly because of reductions in the short-term debt of $3.872 billion, listed under the financing activities section. Cash outlays for dividends totaling $5.742 billion also reduced the total cash flow for the company. FCF gets its name from the fact that it’s the amount of cash flow “free” (available) for discretionary spending by management/shareholders.

Cash Flow vs. Profit: What’s the Difference?

Shareholders can use FCF minus interest payments to predict the stability of future dividend payments. The screen then requires positive free cash flow for each of the last five fiscal years and the most recent 12 months. However, cyclical firms and companies with long development and construction cycles may have periods of slow sales, inventory buildup and strong capex that occur over the normal course of business. These types of firms may be excluded by a requirement of positive cash flow for each year. If you are interested in screening for these types of firms, you may average the free cash flow over a period of years and require this average to be strong. Free cash flow refines the measure of cash flow from operations by considering capex and dividend payments to shareholders.

What is Free Cash Flow?

While calculating valuation multiples, we often use either Enterprise Value or Equity Value in the numerator with some cash flow metric in the denominator. While we almost always use both Enterprise Value and Equity Value multiples, it is extremely important to understand when to use which. If the denominator includes interest expense, Equity Value is used, work in progress or work in process and if it does not include interest expense, Enterprise Value is used. However, companies can report their revenue differently, depending on the accounting method used and their industry. Companies in the retail sector, for example, typically report net sales instead of revenue, because net sales represent the sales revenue after merchandise returns.