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Hi guys, have a newbie question about free cash flow and would appreciate some help in the calculation of free cash flow.
From various sources, free cash flow is commonly explained as the amount of cash flow generated after the company has paid its expenses and reinvested money in the form of capital expenditures.
And so a convenient formula used to generate FCF would be FCF = Net Cash Flow from Operations (CFO) - Capital Expenditures.
However, in financial statements, dividends paid out to shareholders can be accounted for either under Operating Activities or Financing Activities.
So my burning question is whether dividends should be included in the calculation of free cash flow, i.e. whether should dividends be considered a form of "capital expenditure? After all, if a company has a history of dividend payments and investors have invested in the company for its consistent dividend payout, it cannot easily reduce or completely eliminate them.
This seems rather important to me because the impact of dividends in the FCF calculation can be rather large percentage wise for most companies.
Any opinions with strong reasons???
From various sources, free cash flow is commonly explained as the amount of cash flow generated after the company has paid its expenses and reinvested money in the form of capital expenditures.
And so a convenient formula used to generate FCF would be FCF = Net Cash Flow from Operations (CFO) - Capital Expenditures.
However, in financial statements, dividends paid out to shareholders can be accounted for either under Operating Activities or Financing Activities.
So my burning question is whether dividends should be included in the calculation of free cash flow, i.e. whether should dividends be considered a form of "capital expenditure? After all, if a company has a history of dividend payments and investors have invested in the company for its consistent dividend payout, it cannot easily reduce or completely eliminate them.
This seems rather important to me because the impact of dividends in the FCF calculation can be rather large percentage wise for most companies.
Any opinions with strong reasons???