Free Cash Flow Valuation Techniques Key Terms

Calculating your business' financial standing

Those businesses wanting to offer up a clearer view of their financial data choose a free cash flow valuation calculation. Unlike just reporting earnings, free cash flow shows a business' ability to generate profits. Those businesses showing a positive cash flow are deemed financially stable. But even those businesses with a negative cash flow can be viable. A negative cash flow can stem from a company making large investments that could yield high returns over time.

Consider these terms associated with free cash flow valuation to learn more.

 

Free cash flow valuation

A free cash flow valuation is a measure of a company's financial status and is calculated by subtracting capital expenditures from operating cash flow. Free cash flow refers to the cash a company can generate after taking into account the funds it takes to maintain or expand its asset base. Free cash flow valuations helps company officials analyze whether to pursue new opportunities such as acquisitions or developing new products, paying down debt or paying stockholder dividends.
Try: Review an example of how to calculate free cash flow from QuickMBA. Find a more thorough definition of free cash flow through a Motley Fool article.

Earnings before interest and taxes (EBIT)

Operating profits before the deduction of interest and income tax are noted as earnings before interest and taxes or EBIT. Another way of explaining EBIT is the calculation of revenue minus the cost of goods sold and administrative expenses.
Try: Check out this definition and explanation of how to calculate EBIT from 12Manage.

Earnings before interest, taxes, depreciation and amortization (EBITDA)

Calculating earnings before interest, taxes, depreciation and amortization, or EBITDA, gives a picture of a company's operating cash and is based on the company's income. Companies with a large number of fixed assets subject to significant depreciation rates benefit from using the EBITDA calculation. Those companies who just went through an acquisition may also find the EBITDA suitable to their situation.
Try: This Investopedia article not only explains EBITDA but gives the views of opponents and proponents of using the calculation in business.

Depreciation expense

A depreciation expense refers to the act of an asset's being consumed or expiring, in which case it turns into an expense.
Try: Find out more about depreciation methods and calculations from CPAclass.com.

Capital expenditure

Capital expenditures are those funds used to enhance physical assets of a company, whether its the purchase of new equipment, remodeling an office space or purchasing a branch location.
Try: Read through this Tax Guide explanation of capital expenditure.

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