Cash Is King and Free Cash Flow Wears the Crown

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• Because net income can mislead, cash flow and free cash flow are better indicators of a firm’s true financial health

• Capex, working capital and reinvestment affect cash generation and business quality

• Free cash flow metrics drive long-term shareholder value

When asked to evaluate a firm’s performance, many investors look at net income and price metrics such as the price-earnings (P/E) ratio. That’s understandable since earnings numbers are widely reported and tell us how profitable a firm is. Unfortunately, a firm can’t spend “profits.”