Free cash flow is very important in terms of value investment, which is a very popular investment strategy endorsed by Warren Buffett. Free cash flow represents the cash held by a company after maintainence or other ordinary operation costs. It is a key figure to look at when making value investment, as it provides a measure about how much this company is able to provide more opportunities to benefit its shareholders. Amazon is a successful company and focuses more on its free cash flow rather than profitability. However, many people are confused with the term “free cash flow” and “cash flow”, “free cash flow” is not directly shown on companies’ balance sheets and “cash flow” is required to be included in public companies’ balance sheets. There is a traditional way to calculate free cash flow; however, some investors have also invented other ways to calculate free cash flows.
More cash held by a company is definitely a good thing for its shareholders; however, it doesn’t mean making profits is not important. If a company is at its fast growth trend, it is not a big deal to look at its profitability other than its free cash flow. However, a sudden stop for a company’s growth can be a disaster. Because this company does not make profits, is used to a large amount of free cash flow, this company could lose its growth potential. Although the cash held by this company is large, since the growth stops, the company has to try something different to generate growth, and this is a risky moment for the company when it moves to a new field, especially when the company is large. Of course, it can pay dividends to its shareholders by the free cash flow. However, while the shareholders receive extra dividends, the values of their share will depreciate dramatically, as the company completely loses its growth momentum.
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