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Calculating Free Cash Flow

  • 18-06-2014 08:42AM
    #1
    tominator
    Registered Users, Registered Users 2 Posts: 8 ✭


    Hi,


    Free Cash Flow = Net Operating Profit Before Tax - Cash Flows on Investing Activities

    If the Cash Flows on Investing Activities is negative do we subtract or add from Net operating profit before tax?
    e.g.
    Cash Flows for Investing Activities
    Investments held for trading 113
    Investments held for sale (13)
    Sale (purchase) of land, buildings and inventory 25
    Purchase of fixed assets (61)
    Net Cash Generated from Investing Activities 64

    Would you subtract 64 or add 64 to the net cash from operating activities before tax when calculating Free Cash?
    Thanks


Comments

  • #2
    HobbyMan
    Banned (with Prison Access) Posts: 212 ✭✭HobbyMan


    My free cash flow proxy is net operating cash flow less capex which would be purchase of fixed assets. therefore I would substract 61 from net operating cash flow.

    The problem with capex is that you usually don't know how much is maintenance and how much is expansionary. Obviously maintenance capex must be met from operating cash flow where as expansionary capex can be transferred to later accounting periods if needed to be.

    You can also factor in property/land purchases into free cash flow as these could be capex as well. It's always best to read the annual report and the notes to the accounts to get a clearer picture.


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