Free cash flow
Cash from operations after the investment needed to keep the business going. What is genuinely available to the people who funded it.
Where you will meet it
Free cash flow appears in 27 learning outcomes on the CFA syllabus. A few of them:
- Outline the main families of equity valuation model and what each gains or gives up
“Present value models, such as dividend discount and free cash flow models, estimate intrinsic value from forecast cash flows discounted at a required return.”
- Derive FCFF and FCFE, the free cash flows to the firm and to its shareholders, using the cash flow statement
“Free cash flow to the firm starts from operating cash flow, adds back after-tax interest expense because the measure is before payments to any capital provider, and subtracts capital expenditure.”
- Contrast relative with absolute valuation models and give examples of each kind
“Absolute valuation models estimate intrinsic value from the asset's own characteristics, usually by discounting expected dividends, free cash flow or residual income.”
- Explain the signs that indicate cash flow quality
“Free cash flow, operating cash flow minus capital expenditure, shows whether the business funds itself.”
Practise it
Practise free cash flow until it is automatic: questions that explain every wrong option.
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