Assalamu’Alaikum

Welcome
To
My Presentation
Morshedul Alam
Principal officer
Islami Bank Securities Limited
Today's session on
 What Is Free Cash Flow (FCF)

Free cash flow (FCF) is the cash a company generates after taking into
consideration cash outflows that support its operations and maintain its
capital assets. In other words, free cash flow is the cash left over after a
company pays for its operating expenses (OpEx) and capital
expenditures (CapEx).

FCF is the money that remains after paying for items such as payroll,
rent, and taxes, and a company can use it as it pleases. Knowing how to
calculate free cash flow and analyze it will help a company with its
cash management. FCF calculation will also provide investors with
insight into a company’s financials, helping them make better
investment decisions
 WHAT IS FREE CASH FLOW (CONTINUE)

Free cash flow is an important measurement since it shows

how efficient a company is at generating cash. Investors use
free cash flow to measure whether a company might have
enough cash for dividends or share buybacks. In addition, the
more free cash flow a company has, the better it is placed to
pay down debt and pursue opportunities that can enhance its
business, making it an attractive choice for investors.

This article will cover how a company calculates free cash flow
and how to interpret that FCF number to choose good
investments that will generate a return on your capital.
HOW TO CALCULATE FREE CASH FLOW (FCF)
There are three different methods to calculate free cash flow
because all companies don’t have the same financial statements.
Regardless of the method used, the final number should be the
same given the information that a company provides. The three
ways to calculate free cash flow are by using operating cash flow,
using sales revenue, and using net operating profits
Using Operating Cash Flow
Using operating cash flow to calculate free cash flow is the most
common method because it is the simplest and uses two numbers
that are readily found in financial statements: operating cash flow
and capital expenditures. To calculate FCF, locate the item cash
flow from operations (also referred to as “operating cash” or “net
cash from operating activities”) from the cash flow statement and
subtract capital expenditure, which is found on the balance sheet.
 HOW TO CALCULATE FREE CASH FLOW
(FCF)
• Free Cash Flow= ​
Operating Cash Flow −Capital Expenditures​
 LIMITATIONS OF FREE CASH FLOW
One drawback to using the free cash flow method is that capital
expenditures can vary dramatically from year to year and among different
industries. That’s why it’s critical to measure FCF over multiple periods and
against the backdrop of a company’s industry.

It’s important to note that an exceedingly high FCF might be an indication

that a company is not investing in its business properly, such as updating its
plant and equipment. Conversely, negative FCF might not necessarily mean
a company is in financial trouble, but rather, investing heavily in expanding
its market share, which would likely lead to future growth.

Value investors often look for companies with high or improving cash flows
but with undervalued share prices. Rising cash flow is often seen as an
indicator that future growth is likely.