Sample interview questions: Can you explain the concept of a free cash flow and its significance in investment analysis?
Sample answer:
Concept of Free Cash Flow (FCF)
Free cash flow (FCF) represents the cash generated by a company that is available for distribution to its stakeholders. It is calculated as the difference between the company’s operating cash flow (OCF) and capital expenditures (CapEx).
Significance in Investment Analysis
FCF is a key metric in investment analysis for several reasons:
- Financial Stability: FCF indicates a company’s ability to generate cash internally, which is essential for long-term financial stability and sustainability.
- Dividend Capacity: FCF is the main source of dividend payments, making it crucial for investors seeking income-generating investments.
- Investment Decisions: FCF is a basis for evaluating potential investments, as it reflects the company’s ability to create value and return cash to shareholders.
- Valuation: FCF is often used as a metric for company valuation, such as the discounted cash flow (DCF) method.
Calculating FCF
FCF can be calculated using two methods:
- Indirect Method: Starts with the net income reported in the income statement and adds back non-cash expenses … Read full answer