As a part of weekly theme, I will write about cash flow more deeply, especially free cash flow (FCF) and net cash today.
In the previous post about Cash Flow, I explained three major cash flow: operating, investing, and financing cash flow. Let's think of the meaning of them first.
The more operating cash flow, the better
If operating cash flow is positive and more, it means the company's main activies are going well. Otherwise, it is not good sign.
The more investing cash flow, the more …
It is not easy to say what means if the more investing cash flow. It can be generated by selling stocks or properties to ingect some cash into sales activies. If investing cash flow is negative, more investment on facilities or real estate is done.
The more financing cash flow, the more borrowings
If the more financing cash flow is generated, it means the company borrows money from banks or issuing corprate bond. Otherwise, the company return cash for ownings.
Okay, so now let's combine these cash flow and look it as a new indicator.
Free Cash Flow
Free cash flow is defined as the sum of operating and investing cash flow. Typically, investing cashflow is negative and the difference between them indicates the cash the comapny can freely mange to use. If this FCF is low or negative, the company needs to borrow the money from the bank or sell some assets to survive.
Let's assume we get the allowance $500 this month (= operating cash flow), and invest on second-hand mac book air by spending $600. In this case, free cash flow is** -$100**. So we need to borrow the cash from somewhere like our dad. To avoid this borrowing, what we could increase our operating cash flow by working more or reduce the investing cashflow by choosing cheaper laptop.
Net Cash Flow
Now, if you also consider financing cash flow on top of free cash flow, what's left? It is called Net Cash Flow, which means the net worth of cash. If therer is more net cash flow, it might mean the strong financial condition. But at the same time, it could indicate that the comapny cannot use such an amount of cash effectively for further investment.