© 2000 John Petroff
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© 2000 John Petroff |
Some financial analysts give much importance to a concept of cash flow called "free cash flow". The adjective "free" does not intend to suggest either no cost or availability to anyone who asks for it. The cash is considered free in the sense that it can be put to use for any desirable purpose. The larger are such amounts, the more a firm has flexibility and investment strength because it can use the money immediately to take advantage of an opportunity. Think of firms producing portable computers and assume that each firm holds the same proportion of the market. If a new battery is invented that allows the portable computer to be used several days in a row without recharging, but the building of the battery producing plant requires $1 billion and can be licensed to only one manufacturer. It is evident that the firm that has the $1 billion on hand will be the dominant firm in the industry, and other firms will see their market share decline, or will go out of business. Thus, the importance of free cash. The accumulation of free cash comes from free cash flows which are calculated as cash flow from operations, less capital expenditure for ongoing production needs and payment of dividends.
Free cash may be accumulating in liquidity but it is not intended to be used for regular ongoing liabilities. Instead, its purpose is for long term purposes which will be taken in future chapters. Specific reference is again made to free cash in Chapter 10 Section F-3, Chapter 11 Section J-3 and Chapter 14 Section B-1.
See review questions Q-8J3.1 through Q-8J3.5.
See research assignment R-8J3.1.
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