A Newbie Guide to Investing

[dzwm87]

I actually do understand the discounted earnings approach because it makes absolute sense and i can estimate whether the stock is over or under valued.

But i do not catch how the free cash flow is actually link in helping to evaluate a company. I've always seen pple doing valuation on fcf but i couldnt understand how its link to a stock valuation. And since earnings and the cash flow coming in is not literally same, there must be a meaning for the cash flow.

Anyone out there to enlighten me? Greatly appreciate it

Well, when you run a business, what's the most important thing? You definitely want a business to earn profits - not in accounting profits but in cash profits.

Why there is an importance in free cash flow is because you need to re-invest into the business. You can't possibly be collecting your operating cash flow from the business and not re-invest to sustain the business.

The best business is one which funds itself internally and generates a sizeable amount of FCF each year while the worse is the one which demands external funding every year.