One of the best indicators of business health is the Free Cash Flow (FCF) of a company and, unlike some other indicators, it is relatively easy to understand.

Think of the FCF and the deposit you put into a savings account after paying your regular monthly bills. If this deposit continues to grow, you should feel very good about the state of their finances. On the other hand, if your deposit starts the reduction or have to dip into your savings account only to advance the water, you know serious financial problems may be lurking just around the corner.

Corporations operate in a similar way. First, as a paycheck, cash generated from operating the business. This is called Operating Cash Flow (OCF). From this, subtract capital expenditures. Capital expenditures are capital expenditures and physical property, such as real estate. What is left is free cash flow.

The FCF can be used for various purposes, including payment of a dividend, buyback shares, reducing debt or saving for future acquisitions. Without FCF, a business will be difficult to grow your business without issuing new debt or diluting population. Except for launching companies which often show negative cash flow in its early years, free cash flow is a good indicator of the ability of a company to maintain and enhance its operations.

Remember, because the cash flow analysis puts the business in cash to "basis, can uncover problems, even if a company reports earnings per share positive. Krispy Kreme is a recent example of this. Manipulation of revenue is a problem common on Wall Street and FCF can help keep everyone more honest.

This isnÂ't say FCF in itself is not without its problems. If a company refuses to replace aging equipment, free cash flow may be exaggerated. Of course, once the equipment is replaced, the cash flow can take a dive violent. This, in itself, is a red flag that indicates potential danger.

Some investors like the creation of various ratios using FCF. Dividing Free cash flow per share for the current price per share of Company, youÂ'll get a "free cash flow yield.Â" This is useful in comparing companies in the same sector. The higher the yield, the better the population.

Other investors settle for the price "for multiple. free cash flow "Here, we divide the stock price by free cash flow per share. This is somewhat similar to the familiar P / E and, as the P / E, that seeks to lower numbers.

If you simply want to ignore all this, go to MSN Money on the Internet and click a "Stocks. and from there go to "statements" under a "Financial Results.Â" Then go to the "Cash Flow statement. At the bottom of the page youÂ'll see that MSN has done much of this work for you.

Happy Hunting.

Glenn (“Chip”) Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him by email at dahlkefinancial@sbcglobal.net You may also contact Chip at the Living Trust Network. Its URL is http://www.livingtrustnetwork.com

Copyright 2005. Living Trust Network, LLC. All Rights Reserved.

Share the Health