1

I am working through a chapter on the cash flow statement of "Fundamental Analysis for dummies" while at the same time running some of the formulas on a real life example of one company's financial statements. In the dummies book it states that

Free cash flow = Cash from operations - Capital expenditures

I tried carrying out this calculation using the following data from the company's cash flow and capital expenditure statements below respectively:

Cash flow statement Capital expenditure statement

Using these numbers I calculate

Free cash flow = Cash from operations - Capital expenditures = 463.216 - 102.024 = 361.192 

However the company reports their free-cash flow in the cash flow statement as being -111.185 with a foot note that

Free cash flow = Net cash from operating activities + Net cash used in investing activities

Free cash-flow reported

Is the company reporting the same free cash flow as the one mentioned in the dummies book or have I made a mistake in how I calculated the free cash flow. For any one interested the financial statements come from here.

1 Answer 1

1

"Free cash flow" is essentially measuring the net cash flow of a company without taking into account what they borrowed or raised through equity - meaning how much cash is generated by normal operations and investments needed to keep the company growing.

"Net Cash from Investment Activities" would be cash earned from investment activities minus cash spent on investment activities. For most companies, this amount is just negative Capital Expenses, since few companies earn cash directly from their assets. Most of the cash earned from investments is through operating those assets and would be shown under "Cash from Operating Activities".

So "Net Cash from Investment Activities" is usually simplified to "Capital Expenses" with a negative sign.

In this case, if you look at the Investing section of their Cash Flow Statement, there is significant cash inflow and outflow from selling and buying investment securities, which are not operating assets that they would classify as "Capital Expenditures" but actual investments that they make, ancillary to their core business. So the shortcut of using "Capital Expenditures" is not applicable for this company.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .