Great breakdown of the cash flow statement! I especially appreciate how you clarified the difference between EBITDA and operating cash flow—such a crucial distinction that many investors overlook. The working capital example really helped put things into perspective. Thanks for making this complex topic so accessible and practical. Looking forward to more insights like this!
That was really informative and insightful. Thanks! You mentioned that FCF also can be manipulated. How? It would be interesting to see how a company can manipulate the FCF and how we as investors can find the red flags.
Thanks for this! There is no reason to exclude acquisitions from the FCF calculation. Why should companies get a pass for investing in an acquisition, but not for capex? They should be treated the same-both should be deducted from OCF. If the acquisitions are large and intermittent, simply take a rough average per year.
Hi Boise! Thanks for your comment - it brings up a very relevant discussion.
There are two valid interpretations here, and you're free to adopt the one that makes the most sense to you:
1. Acquisitions/M&A are non-recurring and relate to the business's inorganic expansion. That’s why they’re not included in the Free Cash Flow (FCF) of the original business (at least not until the acquired entity is consolidated, etc.).
2. Acquisitions/M&A require real cash outflows, and therefore, some argue they should be factored into FCF calculations.
There’s no clear consensus on this in the literature. Personally, I lean toward the first view, but the second one is also understandable...
Great breakdown of the cash flow statement! I especially appreciate how you clarified the difference between EBITDA and operating cash flow—such a crucial distinction that many investors overlook. The working capital example really helped put things into perspective. Thanks for making this complex topic so accessible and practical. Looking forward to more insights like this!
Thank you so much for the comment, Alexander! I'm glad to be of help.
great write up. nice work.
Thanks a lot, Barry!!
That was really informative and insightful. Thanks! You mentioned that FCF also can be manipulated. How? It would be interesting to see how a company can manipulate the FCF and how we as investors can find the red flags.
Hi Joshua! Thanks a lot for the feedback - glad you enjoyed it.
FCF can be distorted in the short term, but these effects usually don’t last.
Management has a few levers to boost FCF temporarily, such as:
(i) accelerating receivables through bank discounting (which concentrates 12 months of expected cash into one quarter),
(ii) selling assets,
(iii) using accounting reclassifications,
(iv) postponing maintenance CapEx,
or even (v) delaying supplier payments.
It’s always worth digging into the details to see what’s really driving the number.
Thank you, Jimmy, for your response and for this explanation!
This is so important and you made it incredibly accessible!
Thank you so much, Ozeco! I'm glad you liked it!
You made all the concepts so simple, best part was the red flags, with help of that we can filter out best companies. Thanks for posting man.
Thanksss a lot, Aarush! You can count on me.
Thanks for this! There is no reason to exclude acquisitions from the FCF calculation. Why should companies get a pass for investing in an acquisition, but not for capex? They should be treated the same-both should be deducted from OCF. If the acquisitions are large and intermittent, simply take a rough average per year.
Hi Boise! Thanks for your comment - it brings up a very relevant discussion.
There are two valid interpretations here, and you're free to adopt the one that makes the most sense to you:
1. Acquisitions/M&A are non-recurring and relate to the business's inorganic expansion. That’s why they’re not included in the Free Cash Flow (FCF) of the original business (at least not until the acquired entity is consolidated, etc.).
2. Acquisitions/M&A require real cash outflows, and therefore, some argue they should be factored into FCF calculations.
There’s no clear consensus on this in the literature. Personally, I lean toward the first view, but the second one is also understandable...
Great insight and easy to understand.
Thank you so much, Raj! I'd like to invite you to subscribe to Jimmy's Journal. Cheers!