metrics explained

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

When it comes to cash flow, there are two main types: free cash flow and cash flow from financing. Both are important in their own ways, but they have some key differences. Here's a look at the key differences between free cash flow and cash flow from financing.

What is Free Cash Flow?

Free cash flow (FCF) is the cash that a company generates after accounting for operating expenses and capital expenditures. In other words, it's the cash that's left over after a company pays for all of its expenses. FCF is important because it shows how much cash a company has available to pay dividends, repurchase shares, pay down debt, or make other investments.

What is Cash Flow from Financing?

Cash flow from financing (CFF) is the cash that a company generates from its financing activities. This includes activities such as issuing new debt, repaying debt, and issuing new equity. CFF is important because it shows how a company is funding its growth. If a company is consistently issuing new debt to finance its growth, it may be at risk of defaulting on its debt payments in the future.

Key Differences

Now that you know the basics of free cash flow and cash flow from financing, let's take a look at some of the key differences between the two:

  • FCF only includes cash generated from operations, while CFF includes cash generated from both operations and financing activities.
  • FCF is important for showing how much cash a company has available to pay dividends, repurchase shares, pay down debt, or make other investments. CFF is important for showing how a company is funding its growth.
  • If a company is consistently issuing new debt to finance its growth, it may be at risk of defaulting on its debt payments in the future.

Conclusion

Free cash flow and cash flow from financing are both important cash flow metrics. However, they have some key differences. FCF only includes cash generated from operations, while CFF includes cash generated from both operations and financing activities. FCF is important for showing how much cash a company has available to pay dividends, repurchase shares, pay down debt, or make other investments. CFF is important for showing how a company is funding its growth. If a company is consistently issuing new debt to finance its growth, it may be at risk of defaulting on its debt payments in the future.

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