FCF as chart

simba0020 · Nov 14, 2021

Good Sunday Together

I am looking for a way to use the free cash flow as an indicator.
on the chart.

Does anyone know a possibility?
Thanks a lot

Merry Christmas with the dearest

themickey · Nov 14, 2021

simba0020 said:
Good Sunday Together

I am looking for a way to use the free cash flow as an indicator.
on the chart.

Does anyone know a possibility?
Thanks a lot

Merry Christmas with the dearest
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Do you mean a company's free cash flow to determine whether that company is worth investing in?
The greater the free cash flow the more fundamentally strong the company?

Not using as a stock/mkt timer but just as an stock approval filter?

simba0020 · Nov 14, 2021

themickey said:
Meinen Sie den freien Cashflow eines Unternehmens, um festzustellen, ob es sich lohnt, in dieses Unternehmen zu investieren?
Je größer der Free Cashflow, desto fundamental stärker das Unternehmen?

Nicht als Lager-/Mkt-Timer verwenden, sondern nur als Lagergenehmigungsfilter?
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Hello themickey

YES, if I understood it correctly.

I saw it today in a seminar using an example on AAPL, the price came 2 or 3 highest below its fair FCF,so great entry signals

simba0020 · Nov 14, 2021

themickey said:
Do you mean a company's free cash flow to determine whether that company is worth investing in?
The greater the free cash flow the more fundamentally strong the company?

Not using as a stock/mkt timer but just as an stock approval filter?
More...

SunTrader · Nov 14, 2021

How is FCF calculated or determined?

ph1l · Nov 14, 2021

SunTrader said:
How is FCF calculated or determined?
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https://www.investopedia.com/ask/answers/033015/what-formula-calculating-free-cash-flow.asp

How to Calculate Free Cash Flow (FCF)
There are three different methods to calculate free cash flow because all companies don't have the same financial statements. Regardless of the method used, the final number should be the same given the information a company provides. The three ways in which to calculate free cash flow are by using operating cash flow, using sales revenue, and using net operating profits.

Using Operating Cash Flow
Using operating cash flow to calculate free cash flow is the most common method because it is the simplest and uses two numbers that are readily found in financial statements: operating cash flow and capital expenditures. To calculate FCF, locate the item cash flow from operations (also referred to as "operating cash" or "net cash from operating activities") from the cash flow statement and subtract capital expenditure, which is found on the balance sheet.

The formula is:

\begin{aligned} \text{Free Cash Flow} =\ &\text{Operating Cash Flow} \ - \\ &\text{Capital Expenditures} \\ \end{aligned}Free Cash Flow=Operating Cash Flow−Capital Expenditures

Using Sales Revenue
Using sales revenue focuses on the revenue that a company generates through its business and then subtracting the costs associated with generating that revenue. This method utilizes the income statement and balance sheet as the source of information. To calculate FCF, locate sales or revenue on the income statement, subtract the sum of taxes and all operating costs (or listed as "operating expenses"), which include items such as cost of goods sold (COGS) and selling, general, and administrative costs (SG&A).

Finally, subtract the required investments in operating capital, also known as the net investment in operating capital, which is derived from the balance sheet.

The formula is:

\begin{aligned} &\text{Free Cash Flow} = \text{Sales Revenue} \ - \\ &\text{(Operating Costs + Taxes)} \ - \\ &\text{Required Investments in Operating Capital} \\ &\textbf{where:} \\ &\text{Required Investments in Operating Capital} = \\ &\text{Year One Total Net Operating Capital} \ - \\ &\text{Year Two Total Net Operating Capital} \\ &\textbf{and where:} \\ &\text{Total Net Operating Capital} = \\ &\text{Net Operating Working Capital} \ + \\ &\text{Net Plant, Property, and Equipment} \\ &\text{(Operating Long-Term Assets)} \\ &\textbf{and where:} \\ &\text{Net Operating Working Capital} = \\ &\text{Operating Current Assets} \ - \\ &\text{Operating Current Liabilities} \\ &\textbf{and where:} \\ &\text{Operating Current Assets} = \text{Cash} \ + \\ &\text{Accounts Receivables} + \text{Inventory} \\ &\text{Operating Current Liabilities} = \text{Accounts Payables} \ + \\ &\text{Accruals} \\ \end{aligned}Free Cash Flow=Sales Revenue−(Operating Costs + Taxes)−Required Investments in Operating Capitalwhere:Required Investments in Operating Capital=Year One Total Net Operating Capital−Year Two Total Net Operating Capitaland where:Total Net Operating Capital=Net Operating Working Capital+Net Plant, Property, and Equipment(Operating Long-Term Assets)and where:Net Operating Working Capital=Operating Current Assets−Operating Current Liabilitiesand where:Operating Current Assets=Cash+Accounts Receivables+InventoryOperating Current Liabilities=Accounts Payables+Accruals

Using Net Operating Profits
To calculate free cash flow using net operating profits after taxes (NOPAT) is similar to the calculation of using sales revenue, but where operating income is used.

The formula is:

\begin{aligned} &\text{Free Cash Flow} = \text{Net Operating Profit After Taxes} \ - \\ &\text{Net Investment in Operating Capital} \\ &\textbf{where:} \\ &\text{Net Operating Profit After Taxes} = \text{Operating Income} \ \times \\ &\text{(1 - \text{Tax Rate})} \\ &\textbf{and where:} \\ &\text{Operating Income} = \text{Gross Profits} - \text{Operating Expenses} \\ \end{aligned}Free Cash Flow=Net Operating Profit After Taxes−Net Investment in Operating Capitalwhere:Net Operating Profit After Taxes=Operating Income×(1 - Tax Rate)and where:Operating Income=Gross Profits−Operating Expenses

The calculation for net investment in operating capital is the same as described above.

Example of Free Cash Flow Calculation
Macy's Inc. (M)
Macy's cash flow statement for the fiscal year ending 2019, according to the company's 10K statement, indicates:1

Cash Flow From Operating Activities = $1.608 billion

Capital Expenditures = $1.157 billion

\begin{aligned} \text{Free Cash Flow} &= \$1.608 \ \text{billion} - \$1.157 \ \text{billion} \\ &= \$450 \ \text{million} \\ \end{aligned}Free Cash Flow=$1.608billion−$1.157billion=$450million

Interpreting Free Cash Flow
We can see that Macy's has a large amount of free cash flow, which can be used to pay dividends, expand operations, and deleverage its balance sheet (i.e., reduce debt).

From 2017 till now, Macy's capital expenditures have been increasing due to its growth in stores, while its operating cash flow has been decreasing, resulting in decreasing free cash flows.1

Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF—due to revenue growth, efficiency improvements, cost reductions, share buybacks, dividend distributions, or debt elimination—can reward investors tomorrow. That is why many in the investment community cherish FCF as a measure of value. When a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be heading up.

By contrast, shrinking FCF might signal that companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force companies to boost debt levels or not have the liquidity to stay in business. That being said, a shrinking FCF is not necessarily a bad thing, particularly if increasing capital expenditures are being used to invest in the growth of the company, which could increase revenues and profits in the future.

Amortization and Depreciation
To calculate free cash flow another way, locate the income statement, balance sheet, and cash flow statement. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure (or spending on plants and equipment):

Net Income
+ Depreciation/Amortization
- Change in Working Capital
- Capital Expenditure
= Free Cash Flow

It might seem odd to add back depreciation/amortization since it accounts for capital spending. The reasoning behind the adjustment is that free cash flow is meant to measure money being spent right now, not transactions that happened in the past. This makes FCF a useful instrument for identifying growing companies with high up-front costs, which may eat into earnings now but have the potential to pay off later.

Free Cash Flow Benefits
Free cash flow can provide a significant amount of insight into the financial health of a company. Because free cash flow is made up of a variety of components in the financial statement, understanding its composition can provide investors with a lot of useful information.

Of course, the higher the free cash flow the better. But we have already seen from our Macy's example that a declining free cash flow is not always bad if the reason is from further investments in the company that poise it to reap larger rewards down the line.

In addition, cash flow from operations takes into consideration increases and decreases in assets and liabilities, allowing for a deeper understanding of free cash flow. So for example, if accounts payable continued to decrease, it would signify that a company is paying its suppliers faster. If accounts receivable were decreasing, it would mean that a company is receiving payments from its customers faster.

Now, if accounts payable was decreasing because suppliers wanted to be paid quicker but accounts receivable was increasing because customers weren't paying quickly enough, this could result in decreased free cash flow, since money is not coming in quickly enough to meet the money going out, which could result in problems for the company down the line.

The overall benefits of a high free cash flow, however, mean that a company can pay its debts, contribute to growth, share its success with its shareholders through dividends, and have prospects for a successful future.

Free Cash Flow Limitations
One drawback to using the free cash flow method is that capital expenditures can vary dramatically from year to year and between different industries. That's why it's critical to measure FCF over multiple periods and against the backdrop of a company's industry.

It's important to note that an exceedingly high FCF might be an indication that a company is not investing in its business properly, such as updating its plant and equipment. Conversely, negative FCF might not necessarily mean a company is in financial trouble, but rather, investing heavily in expanding its market share, which would likely lead to future growth.

Value investors often look for companies with high or improving cash flows but with undervalued share prices. Rising cash flow is often seen as an indicator that future growth is likely.
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SunTrader · Nov 14, 2021

ph1l said:
https://www.investopedia.com/ask/answers/033015/what-formula-calculating-free-cash-flow.asp
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Thanks but that's Eco 101 stuff.

I meant the FCF indicator on their chart - (big green arrow) pointing the way.

themickey · Nov 14, 2021

I've been trading decades, trading is a journey, we continually pick up new concepts and discard others, even after decades.
Free cash flow is another tool in your arsenal, if using fundamentals I look at several things, net debt, net profit, net margin, P/E, FCF, revenue, mkt Capitilization, Directors, Niche business/moat, how much net proft covers net debt etc.

Some traders ignore everything and just consult charts, price, perhaps with or without volume. There is merit to this method.

My experience, often stupid stocks rise stupidly, they rise purely on the crowd being attached (momentarily in time, eg a fad that fades with time) to the hype, eg hydrogen theme or technology theme or crypto theme.... etc, so fundamentals become meaningless.

What I found interesting was OP could find free cashflow charts as an indicator, I don't recall ever seeing a provider supply these.

taowave · Nov 14, 2021

Stock Rover may have it as a charitable metric,but it's a waste of time as a timing indicator..

It's announced every 3 months for the earlier quarter..

How could cash flow from operations- cap ex help???

As a screen metric yes,timing indicator NOPE

SunTrader · Nov 14, 2021

taowave said:
Stock Rover may have it as a charitable metric,but it's a waste of time as a timing indicator..

It's announced every 3 months for the earlier quarter..

How could cash flow from operations- cap ex help???

As a screen metric yes,timing indicator NOPE
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Did you see my post above - #7?

The OP has a squiggly indicator line on his chart. It is not a straight line - quarter to quarter. So it would seem it is not just cash flow projected forward.

Let's see what they have to say and whether that explains it.