Free Cash Flow vs. Operating Cash Flow: An O🍎verview

Free cash flow is the cash left over for discretionary spend🌟ing after subtracting money🍰 spent on capital expenditures from the money generated by normal business operations.

Operating cash flow, on the other hand, is the cash that's generated from normal business ope🐓rations—like selling the products a company manufactures.

It's the money from which capital expenditures are subtracted to get free cash flow.

澳洲幸运5官方开奖结果体彩网:Free cash flow and operating cash flow are often used as metrics when comparing competitors in the same or 💫comparable industries.

Both figures, along with earnings, are important for investors and analysts to consider when they're researching and evaluating a company for investment.

Operating Cash Flow

Operating cash flow is an important metric because it shows investors whether or not a company makes enough money to 澳洲幸运5官方开奖结果体彩网:pay its bil💝ls, taxes, or operating expenses.

❀In other words, there must be more operating cash inflows than cash outflows for a company to be financially viable in the long term.

Operating cash flow is calculated by taking revenue and subtracting operating expenses for the period. It's recorded on a company's cash flow statement, which is reported both on a quarterly and annual basis. 

The amount of operating cash flow indicates whether a company is generating enough money to run the business and also to grow its operations. It can also indicate when a comp💟any may need external financing for capital expansi💫on. 

Free Cash Flow

Free cash flow represents the cash that is available before debt payments, dividend payments, or share repurchases. It's often used to represent the value of a company.

Free cash flow is typically calculated as a company's operating cash flow minus capital expenditures. Capital expenditures are made to buy, maintain, and improve physical assets, such as p🔯roperty, buildings, and equipment.

In other words, 澳洲幸运5官方开奖结果体彩网:free cash flow helps investors determine how well a company generates cash from operations but also how much cash is used capital expenditurཧes.

It can be envisioned as cash left after the financing of projects to main🦋tain or ex☂pand the asset base.

Free cash flow is a also used as a measure of financial performance, similar to earnings. Its use is considered to be one of the non-澳洲幸运5官方开奖结果体彩网:Generally Accepted Accounting🧔 Principles (GAAP) financial metrics.

Free Cash Flow and Dividends

The amount of a company's free cash flow is usually used to calculate how likely a company can make its dividend payments.

Dividends are cash payments made by a company to investors as a reward for continuing to own the company's stock.

If a company generates free cash flow that exceeds dividend payments, it's likely to be seen as favorable to investors. It could mean that the company has enough cash to increase the dividend in the future.

Investors use the free cash flow to equity ratio to determine how much cash is remaining ♎to pay for dividends. It refleꩲcts the cash available only to equity investors.

It is the cash available after the debt 𝄹holders have been paid and afterꦐ debt issues and repayments have been accounted for.

Many analysts feel dividend𒅌 outlays are just as important an expense as capital expenditures.

Sometimes, the board of directors of a company may decide to reduce a dividend payment. However, this usually has a negative effect on the stock price, 𒈔as investors tend to sell holdings in companies that reduce dividends.

Free Cash Flow and Creditors

Free cash flow also reflects money available for distribution to a company's debt holders, including creditors. Lenders want companies to generate free cash flow so that they can pay off their debts.

If a company wanted to borrow an additional amount of money from its bank, the lender would use free 𒁏cash flow to determine the amount of loan the company could repay.

ꦓ The lender would subtract the current debt payments from free cash flow to determine the amount of cash flow remaining to pay for additional borrowing.

Challenges for Free Cash Flow

Companies with significant capital ꦓpurchases may not haꦡve steady free cash flows.

For example, some industries, such as the oil and gas industry, are very capital intensive. Oilꦿ companies must purchase or invest a significant amount of capital in fixed assets such as machinery and drilling equipment.

As💫 🌟a result, free cash flow can be inconsistent over time due to these significant outlays of cash. 

It's important that investors compare free cash flow figures for similar companies or industries. It doesn't make sense to compare the free cash flow of an oil company with the free cash flow of a marketing firm that has no significant capital purchases or fixed assets. 

Free Cash Flow vs. Operating Cash Flow Example

Below is the cash flow statement for Apple Inc. (AAPL) as reported in the company's for theꦗ period ending Dece༺mber 28, 2019.

Operating Cash Flow

At the top of the cash flow statement, we can see that Apple carried over $50.224 billion in cash from the balance sheet and $𒆙22.236 billion in net income (or profit) from the income statement.

Once the day-to-day operating expenses are deducted, we arrive at the company's operating cash flow of $30.516 billion (highlighted in green on the image below). The aggregate amount of operating cash flow included daily operating activities, such as:

• Inventory purchases of $28 million
• Accounts receivables of $2.015 billion, which represents money owed to Apple by its customers for booked sales
• Accounts payables of $1.089 billion, which is money owed by Apple to its suppliers and vendors

Free Cash Flow

• Apple invested in a new plant and equipment, purchasing $2.107 billion in assets (highlighted in red) with a cash outlay.
• We know from above that the company's operating cash flow was $30.516 billion.
• As a result, Apple's free cash flow was $28.409 billion for the period ($30.516 - $2.107).

The Bottom Line

Operating cash flow and free cash flow are two measures of a company's cash. Operating cash flow is the amount of money that a company makes from its operations. Free cash flow is that amount less capital expenditures.

Both provide information to investors about a company's operational performance, financial health, and prospects for the future.