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When looking at for example Netflix’s cash flow statements here http://financials.morningstar.com/cash-flow/cf.html?t=NFLX&region=usa&culture=en-US&ownerCountry=USA, there is a big difference between company’s free cash flow (279) and net change in cash (-6) in year 2009.

It appears that on the referenced page, free cash flow is calculated as operating cash flow – capex where capex consists of investments in property and purchases of intangibles. So, for example, purchases of investments are not part of capex and thus it is not taken into account when calculating free cash flow.

Why it seems that important elements are left out from the free cash flow calculation on the referenced page?

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Free Cash Flow (FCF) is not a metric/data point which represents any ACTUAL cash flow of a company.

FCF is a data point which communicates how much cash a company has after Operating cash requirements and cash expenditures "required" to grow and maintain the existing business.

FCF can be used to pay dividends, buy back stock, purchase companies, et cetera. None of which are REQUIRED to run the business.

  • I see. So why do you think that "purchases of investments" is not taken into account in the capex? – jjei Apr 16 '14 at 19:07
  • Because "investments" are generally considered to be a discretionary expenditure (i.e. "investments" are not required to operate the business). – Douglas Denhartog Apr 16 '14 at 19:20
  • Investopedia says that "Earnings can often be clouded by accounting gimmicks, but it's tougher to fake cash flow". investopedia.com/terms/f/freecashflow.asp Do you agree with that? It appears that capex and thus free cash flow has a somewhat loose definition which to me, makes it more vulnerable to accounting gimmmicks. – jjei Apr 16 '14 at 20:57

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