Cash Flow
Operating Cash Flow
Cash flow before any investment or financing activities. If a company cannot generate adequate operating cash flow, it will not be able to meet its financial obligations.
Cash flow from operations is the cash version of net income. It shows how much cash-the cold, hard kind-a company's business generated in a given period. The assorted assumptions made by accountants when they tote up net income have no effect on cash flow from operations, so the two numbers can differ substantially.
Many investors focus on cash flow from operations instead of net income because there's less room for management to manipulate, or accounting rules to distort, cash flow. If net income is much larger than cash flow from operations, it's a signal that the company's earnings quality-the usefulness of earnings-is questionable. If cash flow from operations exceeds net income, on the other hand, the company may be much healthier than its net income suggests. That's why many investors, when they try and value a stock, will use the price/cash-flow ratio-the share price divided by cash flow from operations per share-instead of the P/E ratio.
Capital Spending
Also known as capital expenditures, this figure represents a company's material expenditures in a given year which are expected to benefit future periods, such as spending for property, plants, and equipment, and intellectual properties such as software, trademarks, and patents.
Capital spending shows how aggressive a company burns through cash. A young company investing heavily in its growth will naturally have high capital spending relative to its cash flow from operations. A mature company will tend to have lower capital spending relative to its cash flows. Some capital-intensive companies, like electric utilities, tend to have high capital spending year in and year out.
This information is found on the Statement of Cash Flow in a company's financial reports and is expressed in millions of dollars ($M).
Free Cash Flow
This figure is calculated by subtracting capital spending from cash flow from operations for the same time period. Free cash flow is expressed in the millions of dollars ($M). Free cash flow is the money left over after investment, and it can be used to pay dividends, buy back stock, or pay down debt.
Free cash flow shows whether a company is really making money or not. It's the cash flow left over after investment, and can be used by the company to purchase other firms, pay dividends, reduce debt, or buy back stock. Young, aggressive companies typically have negative free cash flow, since they're investing heavily in their futures. As companies mature, though, they should start to generate free cash flow. Generating heaps of free cash flow is one sign of a highly successful company.
This information is found in the company's cash flow statement.
Operating Cash Flow
Cash generated from business operations.
Operating Cash Flow Growth-YOY
The percentage change in Operating Cash Flow from the previous year.
Free Cash Flow Growth-YOY
The percentage change in Free Cash Flow from the previous year.
Cap Ex as a % of Sales
Capital expenditure (investments to build new property, plant, and equipment) as a percentage of sales.
Free Cash Flow / Sales
Free Cash Flow as a percentage of Sales. This is the Free Cash Flow generated by each sales dollar.
Free Cash Flow / Net Income
Free Cash Flow as a percentage of Profit. This is the Free Cash Flow generated by each dollar of profit, and is one measure of earnings quality.