FCF to firm

This topic has 3 replies, 2 voices, and was last updated 5 years ago by John Moffat.

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February 15, 2021 at 3:39 am #610428
Noah098
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I do not understand this definition of FCF to firm, provided in my study text:

“Cash that is not retained and then reinvested in a business is called free cash flow.”

I honestly feel that it should rather be the “cash that IS RETAINED and reinvested in business”
February 15, 2021 at 7:55 am #610454
John Moffat
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The free cash flow is the cash available for paying to the investors (equity and debt). It is not available if it is used to purchase new assets.
February 19, 2021 at 9:51 am #610939
Noah098
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Everything else remaining constant, if the company’s FCF is falling then that means it is reinvesting more and more of its cash flows in Capex, right sir? Which is a good sign for long-term investors.
February 19, 2021 at 3:47 pm #610953
John Moffat
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Companies tend to have a constant rate of retention and therefore provided the earnings are growing the free cash flow will also grow.

If the FCF is falling it is more likely that the company is not doing very well!
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