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• #Free cash flow formula from ebitda free

As a company that generates massive profits and has relatively low capital requirements, Apple is one of the most consistent free cash flow generators around. You can see that in each of the past 10 years, Apple has generated positive free cash flow, totaling to a cumulative $321 billion. See Apple’s historical free cash flow, dating back to 2008, in our model here. Per Figure 2, Apple (AAPL) has the most free cash flow out of all companies under coverage over the trailing twelve months as of September 2019. Sources: New Constructs, LLC and company filings In the 18 months after we published our Hertz article, the stock dropped 39% while the S&P 500 was up 7%.īut a P/E multiple wouldn’t have told you that, would it? Companies with the Most Positive/Negative Free Cash Flowįigure 2 contains the S&P 500 companies with the highest and lowest level of FCF and their FCF yields.įigure 2: Companies with Most Positive/Negative FCF: Trailing Twelve Months as of September 2019 The high capital cost of maintaining its rental fleet explains why Hertz’s total debt increased from $15.3 billion in 2015 to $20.7 billion in 2019. In 2018, Hertz spent $12.5 billion on additions to its rental fleet, while depreciation and sales of its vehicle totaled $11 billion. In order to sustain its various business operations, Hertz must invest higher rates of its profits back into its business. HTZ’s negative free cash flow yield gave a more accurate picture of the true economics of the business. However, as our article, “ No Light at the End of the Tunnel for This Stock”, pointed out, this low P/E was based on overstated GAAP net income due to the impact of tax reform. In early 2018, Hertz had a P/E multiple of just 6, well below the S&P 500 average of 22. They are an oversimplified metric used to quickly estimate future performance.įCF yield is an accurate measure of future company and stock performance because it is derived from two calculated accurate values: free cash flow and enterprise value. Rule #3: FCF yields > P/E multiplesĪlthough they are beloved by the financial media, P/E multiples (price-to-earnings multiples) tell us little about a company. We can also compare the FCF Yields to bond yields. We can use the FCF Yield to rank all stocks on an apples-to-apples basis. FCF Yield is the answer: the ratio of Free Cash Flow to a company’s enterprise value (FCF/ Enterprise Value). We need a metric that tells how highly the market is valuing FCF. Per Valuation 101, smart investing is about buying low expectations and selling high expectations. Rule #2: Cash may be King, but FCF yield is an Aceįree Cash Flow is an important metric, but the level of FCF, by itself, does not provide enough information for an investment strategy. Otherwise, you could be making bets on bad information – more details below.

Make sure you can audit any cash flow numbers on which you based investment decisions. This paper, especially the Appendix, and these white papers show how much diligence goes into getting NOPAT and Invested Capital, the variables used to calculate FCF, right. Be particularly wary of the FCF numbers that come from Wall Street, companies or anyone trying to sell you stock.

Getting an accurate FCF takes lots of work so almost nothing you see on free websites is accurate. However, not all cash flow metrics are made the same. Companies need cash to make, market, or distribute products and services. If you remember one thing from Accounting 101, it should be: Cash is King. Learn more about the best fundamental research Rule #1: Cash is (not always) King