馃攳
Cash Flow vs Free Cash Flow | Best Differences You Must Know! - YouTube
Channel: WallStreetMojo
[10]
hello everyone hi welcome to the channel
of Wallstreetmojo. Watch the video
[15]
till the end also if you are new to this
channel then you can subscribe us by
[19]
clicking the bell icon. Friends today we
are going to learn a tutorial on cashflow
[24]
vs. free cash flow and what are the top
top 9 differences you must actually know.
[30]
See the difference between the cash flow
and free cash flow is a complete havoc.
[35]
See one is used to find out how much
cash comes in or how much cash come into
[42]
the business and how much cash goes out
at the end of the period and another is
[45]
used to find out the valuation of the
company like DCF method so cash
[50]
flow is much broader in concept and free
cash flow is computed by using earning
[54]
before interest and taxes. So as an
investor you should know both of them.
[57]
Cash flow will help
you to see a real picture in the
[61]
organization and the free cash flow of
will help you to find out the value of
[66]
the stock you can say and by using the
DCF method. So let's see the infographics
[72]
of cash flow vs free cash flow so
here is infographics. let's learn the
[76]
definition the cash flow finds out the
net cash inflow of the operating
[80]
investing and financing activities of
the business that is like the cash flow
[84]
statement sort of and the free cash flow
is used to find out the present value of
[87]
the business that is the done with the
help of discounted cash flow method and
[91]
that is used for valuation now over here
the objective the main objective is to
[95]
find out the actual net cash inflow in
the business so operating, financing and
[100]
investing activities whatever the
negative positive and finally the
[104]
balance will be your net cash inflow of
the business or outflow of the business.
[109]
The main objective is to find the
valuation which is very important value
[112]
of the valuation of the business for
investor and the famous method is a
[115]
universal method I could say DCF. Scope
the scope of the cash flow is much
[120]
more broader over here it is limited to
the valuation the equation cash flow is
[126]
cash flow from operating activities plus
investing activities plus financing
[131]
activities so operating
the operations of the business
[134]
investment means any sort of acquisition
of assets financing means of equity
[139]
shares debentures bonds over here the
free cash flow is your earning before
[143]
interest and tax which is known as your
operating profit which is known as
[147]
operating profit into one minus tax rate
so when you do ebit into one minus tax rate
[151]
you get NOPAT which is net operating
profit after tax you add that
[155]
depreciation that means any non-cash
expenditure deduct any capital
[159]
expenditure less any increase or
decrease in the net working capital that
[163]
will give you your free cash flow. The
next is complexity see preparation of
[168]
the cash flow gets a complex when
multiple cash and non-cash transaction
[173]
takes place during the year but
preparation of the free cash flow
[177]
becomes complex when we need to
calculate everything before applying the
[180]
formula see the time consumption. Cash
flow takes a reasonable time
[184]
over here if all the information is
available FCF does not take a lot of
[188]
time to calculate but if any information
is missing or you have to assume or
[192]
there is a way you that there is an art
that you need to put in over there to
[196]
acquire the information it will take it
will be a time-consuming process.
[199]
The key concepts operating cash flow,
investing cash flow and financing cash
[202]
flow as we all see that that is the
formula basically then you can say in
[206]
case of key concepts of FCFF, ebit
capital expenditure and increase and
[211]
decrease in the working capital which we
just saw in the formula. Let's go to the
[215]
next one where it is used the cash flow
is one of the four most important
[219]
financial statement in financial
accounting yes absolutely there are the
[223]
five thing which is important of that
cash flow is one of the four most
[226]
important actually it is
four-year but it should be 5/2 because
[231]
nowadays there are some changes in
schedule 3. The free cash flow is used to
[235]
compute evaluation under DCF method. Sources to create cash flow analysis
[240]
income statement is required must be the
profit and loss statement to compute the
[245]
free cash flow income statement is
required as well okay that is it we this
[250]
are some of the sources of where this
are some of the differences that we were
[255]
supposed to learn now what is first
thing what is cash flow see cash flow
[260]
statement is is one of the most
important statement investor should go
[263]
through before he ever buys the stock of
the company so in income statement
[267]
there is an opportunity to flatten the
profit for the year but in cash but in
[272]
the cash flow it is very pretty tough to
manipulate the numbers and that's why in
[276]
investors due diligence is basically you
can say isn't complete unless you look
[282]
at the cash flow statement first. So
there are two ways through which you can
[285]
calculate the net cash flow the net cash
flow can be calculated with the help of
[291]
two ways the first is called as the
direct method and the second one is
[295]
called over here as indirect method. The
only difference between the direct and
[299]
the indirect method is that is the
calculation of the operating activity so
[304]
first we will look into the cash flow
from the operating activities then we
[307]
will look at the cash flow from the
financing activity and then investing so
[310]
first is operating activities see if we
calculate the cash flow from the
[315]
operating activities from indirect
methods this is the most preferred
[318]
method for the organization to calculate
the cash flows from the operations so in
[322]
indirect method the cash flow analysis
following things should be kept in mind
[326]
first you need to look at the income
statement okay and you need to pick up
[332]
the net income to begin
with the competition that is you have to
[336]
start with the net income then you need
to add back all the non-cash expenses
[341]
and like depreciation, amortization as
this are not the cash expenses they
[345]
could they should be added back. Next we
will look into the sale of the assets so
[351]
basically sale of the assets if their
there are any loss on the sale of the
[355]
assets the amount of the loss should be
added back if there is any gain on the
[358]
sale of the assets the amount of the
gain should be deducted next if there is
[361]
any non current assets do some
adjustments so non current assets you do
[366]
some adjustments in the same at last
will make necessary changes in the
[370]
current assets also and in the current
liability also right. So let's see an
[376]
example on this let's say there is
company XYZ which has a cash flow from
[381]
operating activities in indirect method
we are using the net income is 100000
[385]
the depreciation 7600, is your taxes 600,
accounts receivable 2300,
[390]
increase in the inventories 8700
in the negative increase in the
[395]
Accounts Payable 800, accrued
interest 1600 and loss on
[398]
sale of property 1000 which
gives you the net
[400]
cash flow from the operating activity
99400 so over here
[405]
the adjustments have been made this has
all been added back then in increase is
[409]
been deducted the increase in accounts
payable added and increase in a interest
[413]
payable again added loss on sailor
property has been added back so that
[417]
gives you your operating activity
I hope you got to learn how things have
[422]
been done now cash flow from the
investing activity see other than the
[425]
operations organization also invest in
other assets and that's why we need to
[429]
calculate the cash flow from investing
activity as well so we need to first add
[432]
back all the losses that have been
incurred on the selling of the long-term
[437]
assets and the next we need to deduct
any gains we may have been made on the
[442]
selling of the long term loans. Let's see
an example how things are been over
[446]
there. As you can see there is a free
cash flow from operating
[449]
activities that is 100000, then there
is a purchase of the plant of 64000
[453]
that's why it has been deducted
because it is an outflow then there is a
[456]
cash from the sale of land which is
24000 right which is
[459]
again an inflow so this is your balance
in the operating activities you deduct
[465]
the amount of in the plant and any sale
will be added which gives with your net
[469]
cash flow from the investing activity as
60000. Now in cash flow for
[474]
financing activity we'll consider the
following things like you know the
[478]
buyback of the stocks and borrowing and
repaying the loans or short
[482]
term and long term loans should be
included in the cash flow from the
[484]
financing activity will also take
dividend paid into account which is very
[489]
important. Let's see an example on how
things work out in that area see
[493]
the cash flow from the investing
activity is 60000 that was the
[496]
balance that we saw over there.
Let's say if the cash dividend that has
[500]
been paid so the cash dividend should be
taken into account so that has been
[504]
deducted 4400, any issue
of the preference share because it is a
[508]
cash inflow it has to be added any sale
of the bond again that is an inflow that
[513]
will be added so that gives your net
cash flow from the financing activities
[516]
right. So now what is exactly free cash
flow see this is the utmost importance
[523]
because then only we would under
how free cash flow is relevant in
[529]
calculating the valuation of the
business it's like the free cash flow
[532]
that is FCF is equal to you
can say the ebit that is earnings before
[536]
interest and tax okay then you multiply
this into one minus tax and then after
[543]
you need to add back any depreciation
expenses plus you need to add back you
[549]
any changes in the working capital and
finally deduct any capital expenditures
[555]
if any. So note here
the working capital would be
[559]
calculated by going into the cash flow
from the operating activities and doing
[562]
the adjustments regarding the current
assets and current liabilities now we
[567]
look at some of it an example of how to
illustrate the free cash flow let's see
[571]
let's say there is company XYZ and it
has a following information like a ebit
[575]
which is - like $240,000, tax rate 33.33%
depreciation is
[579]
is $2400, capital expenditure $11000
increase in working capital
[584]
$6500 so just you apply the formula it is
written two lakh forty thousand into one
[589]
minus the tax rate plus you have added
depreciation you have deducted your
[594]
capital expenditure and you have
deducted your increasing working capital
[597]
that gives you your final FCFF as one
lakh forty four nine hundred now see now
[602]
let's understand how the free cash flow
is relevant in computation of the
[606]
valuation under DCF method. See in free
cash flow is calculated so that under
[610]
DCF method we can use free cash flow FCF. Here the formula is share price is
[615]
equal to present value the FCFF plus
cash less debt divided by the shares
[621]
outstanding that gives you your total
share price p0 and here
[624]
FCF stands for free cash flow previous
your present value basically you are
[628]
bringing back the cash flows from the
future in the present by discounting it
[633]
now we'll take an example on to
illustrate the DCF method. Let's see
[638]
company ABC has the following
information furnished to us a free cash
[642]
flow 150000, cash 15000,
debt 75000 and
[645]
number of shares outstanding as 40000
WACC is 12% which is
[649]
discounting rate and growth is 4%.
So over here
[653]
we need to compute the share price okay
using the above information. So let's
[657]
look at formula under DCF.
DCF method we have learned PV of FCF
[661]
plus cash less debt upon total number
of shares outstanding that gives you the
[664]
share price. So we'll put this into the
figure this is
[668]
basically PV of we'll put this in the
figure from the example and we need to
[672]
understand what is PV of FCFF so
present value the FCFF is you have
[677]
discounting
till the perpetuity that is a free cash
[680]
flow divided by WACC - Growth so
basically it is of Gordon's growth model
[684]
you can say the G it's it's called
Gordon's growth model okay for more
[689]
details for above formula you can go for
the terminal value calculation where the
[692]
growth rate isn't available we would
only use the weighted average cost of
[695]
capital that is WACC over here and
nothing else let's put some figures and
[699]
understand how the figures have been
worked out that is a share price and
[703]
other details so the share price over
here is the amount of free cash flow is
[708]
150,000 so we have inputted that
150000 upon WACC- Growth plus we
[716]
have added 15,000 as cash less debt upon
the total number of shares outstanding
[722]
so that gives you your total share price
as 45.38. Now what
[728]
is the relevance of the free cash flow
to the investor see other than using the
[731]
DCF method FCF is also great measure
for finance financial performance of the
[735]
company
the free cash flow is the cash of a
[738]
company and is able to generate after
maintaining or expanding the asset base
[741]
of the company if one company has has
more free cash flow then that means it
[746]
has more liquidity even after
maintaining or spending cash or on its
[749]
asset but it it can also mean that the
cash is underutilized and cash can be
[754]
invested in the acquisition of the new
investor the new assets that's why it is
[758]
very important to look at the holistic
picture of before trying to interpret
[762]
the free cash flow for any of for any
company. Let's see the key differences
[766]
and let's learn about how things go
about now here is the comparison of the
[770]
free cash flow the definition we have
learned the net operating investing and
[774]
financing activity so the free cash flow
is used over here as to discount the
[778]
value of the business objective is to
find out the actual net cash flow of the
[783]
business. The main objective is to find
the valuation of the business the scope
[786]
of the cash flow is broader over here it
is limited you can say the equation is
[792]
we just studied operating investing in
financing activity and over here Ebit
[796]
1 - tax plus depreciation deduct any net
increase in working capital and
[801]
capital expenditure. Preparation of cash
flow of complex cash flow gets complex
[806]
when the multiple cash and non-cash
transactions takes place during the year
[808]
preparation of the FCFF become complex
when we need to calculate everything
[812]
before the applying the formula the time
consumption cash flow it takes a
[817]
reasonable time over here if all the
information is available FCFF does not
[821]
take a lot of time key concepts same all
three over here all the part of the
[825]
formula all the components of the
formula where it is used one of the four
[829]
most important of financial statement in
the financing accounting and it is used
[832]
under DCF method and the sources to
create the cash flow analysis over here
[837]
to complete the free cash flow of the
income. So let's make the final
[841]
conclusion regarding this cash flow and
free cash flow may seem like similar
[844]
concepts but they are completely
different the basic difference is the
[848]
way they are used one is used to guess
the viability of the business and
[851]
another is used to find out the
valuation of the business before
[854]
investing so as an investor you need to
look at both of them to have a holistic
[858]
picture of the business if you compare
between cash flow and free cash flow in
[862]
terms of importance cash flow analysis
should be your first preference because
[866]
after a certain a net cash flow from
the cash flow statement
[869]
you can always compute free cash flow
from there. So that's it for this
[874]
particular topic if you have learned and
enjoyed watching this video please like
[878]
and comment on this video and subscribe
to our channel for the latest updates
[882]
thank you everyone Cheers.
Most Recent Videos:
You can go back to the homepage right here: Homepage