This lesson focuses on the analysis of the statement of cash flows, which is a critical tool for assessing liquidity and financial health. It covers free cash flow calculation and the use of cash flow ratios .

• Analysis of Sources and Uses of Cash: The statement of cash flows provides insights into where a company is generating cash and how it is using it. Analysis of the three sections—operating, investing, and financing—helps identify trends and assess financial health .

• Free Cash Flow (FCF): Free cash flow is the cash available to all capital providers after accounting for capital expenditures. It is calculated as:

  • FCF = Operating Cash Flow – Capital Expenditures

  • FCF is a key metric for valuation and assessing financial flexibility. It represents the cash that can be used for dividends, debt repayment, or investment .

• Free Cash Flow to Equity (FCFE): FCFE is the cash available to equity holders after interest and principal repayments. It is calculated as:

  • FCFE = FCF – Interest after tax – Principal Repayments + New Debt Issued 

• Cash Flow Ratios: Several cash flow ratios are used to evaluate financial health :

  • Operating Cash Flow Ratio: Operating cash flow divided by current liabilities—measures ability to meet short-term obligations.

  • Cash Flow to Interest Coverage: Cash flow from operations divided by interest payments—measures ability to meet interest obligations.

  • Cash Flow to Capital Expenditures: Operating cash flow divided by capital expenditures—measures ability to fund capital investments from operations.

• Common-Size Analysis of Cash Flow: A common-size cash flow statement expresses each line item as a percentage of total cash inflows, providing insights into the relative importance of different cash sources .