Part Four
TOOLBOX
FREE CASH FLOW
EBITDA, as we noted earlier, is no longer Wall Street’s favorite measure to watch. Now the hot metric is free cash flow. Some companies have looked at free cash flow for years. Warren Buffett’s Berkshire Hathaway is the bestknown example, though Buffett calls it owner earnings.
How to calculate free cash flow? First, get the company’s cash flow statement. Next take net cash from operations, and deduct the amount invested in capital equipment. That’s all there is to it—free cash flow is simply the cash generated by operating the business less the money invested to keep it running, which, of course, IT has a lot to do with. Once you think about it, it makes perfect sense as a performance measure. If you’re trying ...
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