> Given that free cash flow is cash flow minus capital spending, > how can free cash flow exceed cash flow?
By some definitions, free cash flow also nets out changes in inventory, receivables, and payables. So, for example, inventory or receivables shrinkage or payables expansion will deflate cash flow, but not free cash flow -- which is why I describe cash earnings as fcf *unadjusted* for changes in working capital -- as explained in GADR's Methodology: web.idirect.com. I figured everyone would find that part totally borrrrring, but now you see why I had to include it.
> Philosophical question(s): should money put into expansion be
> considered as cap exp?
Definitely.
> It certainly does reduce cash available, but
> if the company is growing, isn't this a more productive use of the
> money than share buybacks?
If it's a growing company like Intel or MSFT, maybe it's
justified (if the growth keeps up -- a big "if".) If it's a slow
grower like GM or IBM, after a prudent reserve is accumulated, the
rest should be returned to shareholders.
> If by definition expansion does figure
> into cap exp, then does fcf give us the best picture of a company?
At the end of the day, it tells you how much cash would be left in
your pocket if you owned the company outright. For people from, say,
Omaha, that's not an unimportant point to ponder.
> How does Intel, which spends gobs on new plants, manage to pile up
> so
> much cash in the bank?
1. It has extraordinary margins for a manufacturer because of:
a. market dominance (so far);
b. piggybacking on MSFT's growth.
2. It doesn't want to add chipmaking capacity beyond the present
level.
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