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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Uncle Frank who wrote (49256)11/29/2001 3:10:51 PM
From: EnricoPalazzo  Read Replies (1) of 54805
 
Now, going one step further, do you think operational cash flow is an adequate indicator, or is it necessary to try to quantify free cash flow?

Operational Cash Flow is absolutely not sufficient, because it only accounts for some of the costs of doing business.

Company A makes $10 per year in OCF, and spends $3 per year on capital expenditure. Free Cash Flow is $7 per year.

Company B makes $10 per year in OCF, and spends $9 per year on capex. FCF is a mere $1 per year.

For Company B, capex eats up the vast majority of operating cash flow. The profits that then accrue to the shareholder are far lower.

Also, given that some investors look primarily at Operating Cash Flow, I wouldn't be surprised if some companies tended to hide bad news in Capital Expenditure.

Of course, even Free Cash Flow isn't a perfect indicator, because companies can and do manipulate Capital Expenditure to make a given year look better or worse. That's why it pays to look at these numbers over a period of time.
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