Monday, January 21, 2019
Differences in Earnings Releases and 10-Ks

Wednesday, January 16, 2019
The Importance of Textual Analysis

Tuesday, January 8, 2019
A Look at Climate Change Disclosures

Wednesday, January 2, 2019
Quants: Point-in-Time Data for Backtesting

Friday, December 28, 2018
Now Showing: Controls & Procedures

Thursday, December 27, 2018
A Reminder on Non-GAAP Reporting Rules

Monday, December 17, 2018
Researching PG&E’s Wildfire Risk

Wednesday, December 12, 2018
Tracking Brexit Disclosures

Thursday, December 6, 2018
Campbell Soup: Looking Behind the Label

Sunday, December 2, 2018
SEC Comment Letters: The Amazon Example

Wednesday, November 28, 2018
Measuring Big Pharma’s Chemical Dependency

Monday, November 26, 2018
Analysts, Can You Relate? A True Story

Monday, November 19, 2018
Digging Up Historical Trend Data: Quest Example

Sunday, November 11, 2018
Cost of Revenue, SG&A: Q3 Update

Monday, November 5, 2018
Lease Accounting: FedEx vs. UPS

Saturday, November 3, 2018
New Email Alerting Powers

Wednesday, October 31, 2018
PTC and Two Tales of Revenue

Tuesday, October 30, 2018
10-K/Q Section Text Change Detection

Sunday, October 28, 2018
Finding Purchase Price Allocation

Sunday, October 21, 2018
Charting Netflix Growth in Three Ways

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Free cash flow is generally defined as a company’s operating cash flow minus capital expenditures. That is, it’s the money that remains after the company pays to maintain its assets and operations.

Technically free cash flow is a non-GAAP metric, which means we’re supposed to squint at it and wonder how reliable a company’s “FCF” really is— but in the real world, analysts have come to rely on FCF as an indicator of how much cash companies have to finance non-essential endeavors: buying back more shares, investing more in R&D, making acquisitions, and so forth.

So Calcbench decided to take a fresh look at FCF among the S&P 500 over the last few years, and the trend isn’t where one would like it to be. (We can do that with our Data Query Tool, which tracks non-GAAP metrics at the bottom of the page.) While FCF varies substantially from one quarter to the next, the trend is decidedly downward.

The trend line in red, above, shows that average FCF per quarter fell from just above $600 million in first quarter 2013 to $500 million in first-quarter 2017— a decline of nearly 17 percent.

Ah, but before we start predicting doom and gloom, what about FCF trends for all public filers? What do those numbers say? Take a look.

Average FCF starts from a much lower base, since the population includes many more companies with much lower revenue and expenditure. But the overall trendline for this group tilts upward, from the mid-50 millions in 2013 to the high 50 millions in 2017.

The next question is why FCF is fluctuating the way it is. That’s more difficult to answer, because FCF is a non-GAAP metric that companies can “adjust” in any number of ways. Our quick sketch of the numbers doesn’t capture that. It only captures a broad trend that might prompt financial analysts to look more closely at the FCF trends of specific companies they follow.

The SEC stresses that FCF “does not have a uniform definition and its title does not describe how it is calculated”—so if you want to report it, you need to describe how you calculate it and then reconcile the number back to GAAP-approved cash flows from operating activities. You also should refrain from hyping FCF as a pile of money available for any good idea that comes along; it might be needed to service debt covenants, for example.

Still… that red line in the chart above only points in one direction. If the company you follow keeps talking about growth via acquisition, or plans major R&D expansion, or has a debt obligation coming due soon, you may want to ask where the money to pay for that is going to come from. There may be less free cash laying around than we assume.

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