If you would like a full deep dive into Free Cash Flow Payback Period, please check out the thorough deep dive article I did on the topic linked.
Use the calculators at the bottom of this article to help you work out the Free Cash Flow Analysis of a Stock or its Free Cash Flow Payback Period, but remember. These are just some tools to help you be a better investor!
Free Cash Flow (FCF) Analysis
Why Free Cash Flow Analysis Matters:
Best for analysing a company’s financial health
- The FCF Analysis evaluates financial health, liquidity, and the ability of a company to fund operations or growth.
- FCF Analysis helps investors to assess whether a company generates enough cash to cover expenses and reinvest that money back in.
- Free cash flow (FCF) is the available cash that can be repaid to creditors and as dividends and interest to investors.
Free cash flow (FCF) represents the cash that a company is generating after accounting for cash outflows to support its operations and maintain its capital assets.
Free Cash Flow to Sales (FCF/Sales) ratio is a measurement of how much free cash flow a company is able to generate for every dollar of sales. In real terms, a higher ratio indicates a more efficient company that is able to generate cash.
In order to calculate FCF You will need 2 things:
- Operating Cash Flow (OCF): Found in the company cash flow statement, this represents cash generated from core business operations.
- Minus —
- Capital Expenditures (CapEx): Money spent on acquiring or upgrading physical assets, found in the cash flow statement.
FCF to Sales Ratio
- FCF / Sales: Requires Sales/Revenue data
Some Guideline Benchmarks for Understanding it:
- Above 10%: Excellent – The company is highly efficient in generating cash from its sales.
- 5-10%: Good – The company is doing well in generating cash.
- 1-5%: Average – The company is generating some cash but may have higher capital expenditures or other costs.
- Below 1%: Poor – The company may struggle to generate sufficient cash from its sales.
Free Cash Flow Payback Period
Best for evaluating a company’s financial health.
What is a Free Cash Flow (FCF) Payback Period?
- Measures how long it takes to recoup an initial investment using FCF.
- Helps determine the risk and efficiency of an investment.
- Shorter payback periods are generally preferable.
In its simplest form, the FCF Payback period formula uses the cost of the initial investment divided by the initial annual cash flow. In the case of a stock, means the company would be at a net positive.
Required Information:
- Initial Investment Cost: The amount spent on a project or acquisition.
- Annual Free Cash Flow (FCF): Calculated using the formula above.
Other Considerations That Shouldn’t be ignored:
- Revenue and profitability trends
- Debt obligations and interest payments required
- Growth investments and dividend payments
- Don’t forget to use other methods of analysing a stock
For Finding the data, as I mentioned, you could find the details in the cash flow statements and company earnings. But otherwise, just type the query into bing.com for fast results!
Free Cash Flow (FCF) = Operating Cash Flow − Capital Expenditures
Free Cash Flow Calculator
FCF Payback Period
Free Cash Flow Payback Calculator
Let me know if you enjoyed using this free cash flow and payback period calculator was useful in the comments, and I will be happy to do more!
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thanks for reading! I’m glad it was helpful 🙂