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Cash Flow from Operations vs Free Cash Flow: What's the Difference?

When it comes to cash flow, there are two key measures that are used by analysts and investors to gauge a company's financial health - cash flow from operations (CFO) and free cash flow (FCF).

At first glance, it may not be immediately apparent what the difference is between these two measures. After all, they both deal with cash flow, right?

Wrong. While CFO and FCF are both cash flow measures, they actually paint very different pictures of a company's financial health.

In this article, we'll take a closer look at the difference between CFO and FCF and why each one is important in its own right.

What is Cash Flow from Operations (CFO)?

Cash flow from operations (CFO) is a measure of a company's cash flow that is generated from its core business operations. In other words, it is the cash that a company generates from the sale of its products or services.

CFO can be calculated by taking a company's net income and adding back any non-cash expenses, such as depreciation and amortization.

The formula for CFO is as follows:

CFO = Net Income + Depreciation & Amortization

CFO is important because it shows how much cash a company is generating from its core business operations. This is important because it is the cash that a company can use to pay for things like new equipment, expansion, and debt repayment.

Investors and analysts will often look at CFO as a way to gauge a company's financial health. A company with a strong CFO is generally considered to be in good financial health, while a company with a weak CFO is generally considered to be in poor financial health.

What is Free Cash Flow (FCF)?

Free cash flow (FCF) is a measure of a company's cash flow that is available for distribution to shareholders. In other words, it is the cash that a company has available after it has paid for all of its expenses, including capital expenditures.

FCF can be calculated by taking a company's CFO and subtracting its capital expenditures. Capital expenditures are things like new equipment, expansion, and debt repayment.

The formula for FCF is as follows:

FCF = CFO - Capital Expenditures

FCF is important because it shows how much cash a company has available to pay dividends, repurchase shares, or pay down debt.

Investors and analysts will often look at FCF as a way to gauge a company's dividend-paying ability. A company with a strong FCF is generally considered to be in good financial health, while a company with a weak FCF is generally considered to be in poor financial health.

The Difference Between CFO and FCF

The key difference between CFO and FCF is that CFO measures a company's cash flow from its core business operations while FCF measures a company's cash flow that is available for distribution to shareholders.

CFO is important because it shows how much cash a company is generating from its core business operations. This is important because it is the cash that a company can use to pay for things like new equipment, expansion, and debt repayment.

FCF is important because it shows how much cash a company has available to pay dividends, repurchase shares, or pay down debt. A company with a strong FCF is generally considered to be in good financial health, while a company with a weak FCF is generally considered to be in poor financial health.

Why CFO is Important

As we mentioned earlier, CFO is important because it shows how much cash a company is generating from its core business operations. This is important because it is the cash that a company can use to pay for things like new equipment, expansion, and debt repayment.

CFO is also important because it is a measure of a company's operating cash flow. Operating cash flow is the cash that a company generates from its day-to-day business operations. It is important to track a company's operating cash flow because it can be a good indicator of a company's financial health.

Operating cash flow is important because it shows how well a company is able to generate cash from its day-to-day business operations. A company with a strong operating cash flow is generally considered to be in good financial health, while a company with a weak operating cash flow is generally considered to be in poor financial health.

Why FCF is Important

As we mentioned earlier, FCF is important because it shows how much cash a company has available to pay dividends, repurchase shares, or pay down debt. A company with a strong FCF is generally considered to be in good financial health, while a company with a weak FCF is generally considered to be in poor financial health.

FCF is also important because it is a measure of a company's financial flexibility. Financial flexibility is the ability of a company to use its cash to fund new opportunities, such as expansion or share repurchases.

Financial flexibility is important because it shows how well a company is able to take advantage of new opportunities. A company with strong financial flexibility is generally considered to be in good financial health, while a company with weak financial flexibility is generally considered to be in poor financial health.

Final Thoughts

In conclusion, CFO and FCF are two important measures of a company's cash flow. CFO measures a company's cash flow from its core business operations while FCF measures a company's cash flow that is available for distribution to shareholders.

Both CFO and FCF are important in their own right. CFO is important because it shows how much cash a company is generating from its core business operations. FCF is important because it shows how much cash a company has available to pay dividends, repurchase shares, or pay down debt.

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