Why Cash Flow Is So Important In Investing

Welcome To The Long Wealth Newsletter (August 1st). (est. 4 min read)

In today’s newsletter we will go over:

  • Free Cash Flow

  • The Important Of Free Cash Flow

  • And much, much, more..

Actionable Tip Of The Day

Free Cash Flow is the cash a company generates after accounting for cash outflows to support operations and maintain capital assets.

The reason we want to look at this is because it provides a clearer picture of a company's profitability than net income, which can be manipulated through accounting practices.

This shows us financial strength and the potential for future value creation.

Pay attention to the trend of Free Cash Flow over time, not just a single year's figure.

A consistent upward trend in Free Cash Flowis often more telling than a single high Free Cash Flow year.

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Deep Dive

Why this matters:

  1. Consistency indicates sustainable business practices.

  2. Growing FCF suggests improving operational efficiency.

  3. It helps differentiate between temporary spikes and genuine financial health.

  4. Trend analysis can reveal potential future performance.

  5. It can highlight management's ability to generate cash consistently.

Remember, a company might have high FCF in one year due to one-time events (like selling a major asset).

Looking at the trend gives you a more accurate picture of the company's long-term cash-generating ability.

Learn to analyze trends:

  • Look at 5-10 years of FCF data to identify patterns

  • Calculate year-over-year growth rates

  • Compare FCF growth to revenue and earnings growth

  • Identify any cyclical patterns in the industry

This will give you a better overall look into their Free Cash Flow.

Darold Trinh

Long Wealth Newsletter

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