Free Cash Flow

Free Cash Flow

The amount of cash that can be withdrawn without harming a firm’s ability to produce future cash flows

Its not always bad to have a negative free cash flow in some instances you are investing for the future of your business of example buying a new facility

Positive FCF

Indicates the company is generating more than enough to cover current investments in fixed assets and working capital

Negative FCF

Indicates a company is not generating enough to cover current investments in fixed assets and working capital meaning they will need to raise new money in capital markets to pay for these investments

Most rapidly growing companies have negative FCFs which is not necessarily bad as a firm’s new investments may be eventually profitable and contribute to its FCF in the future

Market Value Added (MVA)

The difference between the current total Market Value and total capital contributed by shareholders and bondholders

A Higher MVA indicates good performance by the manager although sometimes like a high tide it may just be the result of the overall market

Current Ratio

Current Assets/Current Liabilities

This ratio measures a company’s ability to pay its bills when they are due

Generally you want your ratio above 1

If current liabilities are increasing more than current assets and the current ratio is approaching 0, it may indicate a company is facing financial trouble

Quick Ratio/Acid Ratio

(Current Assets-Inventory)/Current Laibiltiies

Current ratio except it does not include inventory as it is the least liquid asset

It shows companies ability to pay short-term debt

Debt/Capital Ratio

Total Debt/[Total Debt + Total Equity]

A Higher Debt/Capitla Ratio indicates a company is mostly financed through debt.

This means the company has higher financial leverage meaning they can better use debt to magnify returns but it also means the company is more risky and vulnerable to economic downturns.

A low Debt/Capital Ratio means a company is not primarily financed through debt but rather equity

It means the company is more conserved and likely has less financial risk

Debt/Equity Ratio

Total Debt/Total Equity

Higher Debt/Equity Ratio means a company is more financed by debt than equity which means it has more financial leverage and greater risk

A lower ratio indicates a company is financed mostly by equity and has less financial leverage and less financial risk.

Debt/Equity Ratio tells you for each Dollar of Debt how much Dollar of Equity you have

Return on Equity (ROE)

Net Income/Average Shareholder’s Equity

Tells you if a company is effectively using equity to generate profit.

ROE is expressed as a percentage % and gives insight to effectiveness of using equity to generate profit.

Higher ROE shows effective management of equity and good performance

Lower ROE indicates ineffective management or can suggest that a company is not efficient in generating profit from equity financing

COMPARE WITH INDUSTRY

*note in assessing ROE a firm should be sustainable and not using debt (financial leverage) to falsely enhance ROE

Return on Assets (ROA)

Net Income/Total Assets

Indicates how effective a company is at using assets to generate profit

A Higher ROA indicates effective use of assets to generate profit

Interest Coverage Ratio

EBIT/Interest Expense

This ratio helps indicate a company’s ability to meet its interest obligations before interest and taxes

A higher ratio indicates a company is more than able to cover its interest payments in time.

A ratio below 1 indicates a company is unable to meet its interest obligations indicating financial distress

NOTE COMPARE WITH INDUSTRY