There are many methods in evaluating a business's valuation, evaluating the company free cash flow is one of the example.
Free Cash Flow is the total cash inflow generated by the company under its operating activities less the cash it needs to fund capital expenditures (capex) and net working capital needed to maintain current growth of the company.
Energy and transportation companies are the 2 examples of business require high capex as they need substantial capital investments in equipment for R &D, retrieving of natural resources (energy - oil & gas) and replacing their fleets of aircraft (transportation).
On the other side, food & beverages and health products are the 2 examples of business require less capex as they do not need high capital in replacement of their equipment. What they require is a strong branding with a good centralized system to standardize their products while maintaining the value proposition in the business.
That is the reason, it is very important for a business investor to invest in a company/business which requires less capex and net working capital, and the same time it generates higher cash from operation. The left over cash is the free cash flow to the company and it can be used to pay dividend and equity buy back. It is not uncommon also, some management of the business uses this free cash to purchase other businesses to generate more free cash flow. This is the kind of business an investor should really invest.
No comments:
Post a Comment