Finance & Investment Finding the free cash


by MELANIE C - Date: 2007-07-03 - Word Count: 358 Share This!

The bottom line on corporate metabolism comes down to the cash that flows out for shareholders.

In the first two episodes of this three-part series on corporate metabolism, we looked at how a low return on equity could slow down the flow of cash through a company's system. In the end, though, there's no substitute for taking a look round the back end to see what's coming out.

What we're hoping to see is a deluge of cash. But it's not just any old cash that we're after. We want to see unencumbered 'free' cash, and defining this is where you'll find most of the fun and games in cash flow analysis. If you remember back to issue 169, we talked about the difference between maintenance capital expenditure and expansion capital expenditure. Technically, free cash flow is what you have after spending the former, but not the latter. It's the cash that's left for management to do with as it pleases (after keeping the company on track, as it stands).

Unfortunately it's often very hard to tell between the different types of expenditure. For one thing, company managements are prone to playing down the 'standing still' side of things. But what is 'standing still' anyway? If we replace a lathe with a fancy new one that can make three extra widgets per hour, how much is maintenance expenditure and how much is expansion? What if the widgets are better than before and can command a higher price? And do we mean before inflation or after?

The trick is to try a few things and see how well they agree. Let's take another look at the 2004 figures for the ASX and Qantas. The figures in the table come from the statements of cash flows, except for net profit and depreciation, which come from the statements of financial performance and the note on expenses. The two companies give the entries slightly different names, but hopefully you can find them by matching them to the figures.

Visit The Intelligent Investor for the rest of this article on Finding the free cash to find out more on blue chip shares


Related Tags: financial advice, value investing, blue chip shares, share market advice

Your Article Search Directory : Find in Articles

© The article above is copyrighted by it's author. You're allowed to distribute this work according to the Creative Commons Attribution-NoDerivs license.
 

Recent articles in this category:



Most viewed articles in this category: