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Free cash flow - Research Paper Example

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It also forms a basis of calculating the operating cash flow margin, which provides a crucial perspective for calculating the long-term cost trends of a…
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Free cash flow
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Download file to see previous pages It is therefore the cash flow that remains after the firm makes investment in property, plant and equipments. Often, financial analysts consider free cash flow to be more efficient in measuring the strength of a business than the cash flow from operating activities. To remain competitive large companies and other forms of businesses will need to invest in new equipments in order to maintain its competitive nature. These investments affect the level of free cash flow that the business is able to maintain (Yuangchih, 412).
“This study investigates the ability of Free Cash Flow to predict performance in capital intensive and non-capital intensive industries”. (Nunez, 120). Nunez argues that, “many financial scholars and researchers have focused on studying the effectiveness of operating cash flow as a measure of a firm’s performance although other researchers have proved that free cash flow is a better measure since it greatly considers capital intensity”. “Free cash flow as a measure of a firm’s performance is not easy to manipulate compared to the other measures such as earnings, Nunez states. He further states that, “there are various methods used by different firms in determining their actual free cash flow but there is however no specific guidance given regarding the calculation and this is because its disclosure is not a requirement by the US GAAPs”. “The few firms that report their free cash flow therefore use the operations based method while others use the income based method” (Nunez, 121). Nunez stresses that, “Firms that base their calculation on operations use a capital maintenance perspective whereby free cash flow is calculated as cash flow from operating activities less capital that are necessary to maintain the firm at a productive capacity and this observes the guidance provided in the International Accounting Standards Board (IAS 7)”. “The operations based method also uses a perspective ...Download file to see next pagesRead More
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