Question

What are the potential uses of free cash for companies?

Answer 1

Free cash flow (FCF) measures a company’s financial performance. It shows the cash that a company can produce after deducting the purchase of assets such as property, equipment, and other major investments from it’s operating cash flow. In other words, FCF measures a company’s ability to produce what investors care most about: cash that’s available be distributed in a discretionary way.

Knowing the company’s free cash flow enables management to decide on future ventures that would improve the shareholder value. Additionally, having an abundant FCF indicates that a company is capable of paying their monthly dues. Companies can also use their FCF to expand business operations or pursue other short-term investments.

Compared to earnings per se, free cash flow is more transparent in showing the company’s potential to produce cash and profits.

Meanwhile, other entities looking to invest may likely consider companies that have a healthy free cash flow because of a promising future. Couple this with a low-valued share price, investors can generally make good investments with companies that have high FCF. Other investors greatly consider FCF compared to other measures because it also serves as an important basis for stock pricing.

the uses of FCF can be listed as:

1. stock buyback

2.pay dividends

3. repay debt

4. hold cash

5.purchase non-operating investments

6. undertake new activities, invest to expand business, acquire other companies