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Geoff Gannon
Geoff Gannon

How to Calculate Free Cash Flow - 5 Examples From Actual 10-Ks

December 24, 2010 | About:

Some readers have emailed me with questions about exactly how to calculate free cash flow. Do you include changes in working capital? Do you really have to use SEC reports instead of finance websites? Things like that.

Yes. You really do have to use EDGAR. Finance sites can’t parse a free cash flow statement the way a trained human like you can. As you know, I’m not a big believer in abstract theories. I think you learn by doing. By working on problems. By looking at examples.

Here are 5 examples of real cash flow statements taken from EDGAR.

We start with Carnival (NYSE:CCL).


Notice the simplicity of this cash flow statement. It starts with “net income” (top of page) and then adjusts that number to get to the “net cash provided by operating activities” (yellow). To calculate free cash flow in this case you just take “net cash provided by operating activities” (yellow) and subtract “additions to property and equipment” (green). The result is free cash flow.

As you can see, Carnival produces very little free cash flow. Free cash flow is always lower than net income. That’s because cruise lines are asset heavy businesses like railroads. They have to spend a lot of cash to grow. Carnival’s reported earnings tend to overstate the amount of cash owners could actually withdraw from the business in any one year.

Carnival is our example of a “typical” cash flow statement. There’s really no such thing. But this one is simple in the sense that you only have to subtract one line “additions to property and equipment” from “net cash provided by operating activities” to get Carnival’s free cash flow.

Next up is Birner Dental Management Services (BDMS).

>Now for two cash flow statements from tMHP) and Scholastic (SCHL).

><img width=NASDAQ:NFLX).

>For me, free cash flow is the stream ofWarren Buffett does.

That means past records on capital allocation at places like Birner and FICO (FICO) become very important. If the board uses the money to buy back stock, you’ll become very rich. If they pay out dividends, you’ll do okay. If they make acquisitions, they might just squander a sure thing.

So, eventually, we have to move beyond the cash flow statement to evaluate how each year's cash flow will be directed. This is especially important because cash flow snowballs.

And snowballing is how investors grow fortunes.

Talk to Geoff About Calculating Free Cash Flow

About the author:

Geoff Gannon
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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