Finance methodology of Free Cash Flow

Uzi Yaari, Andrei Nikiforov, Emel Kahya and Yochanan Shachmurove

Global Finance Journal, 2016, vol. 29, issue C, 1-11

Abstract: Free Cash Flow (FCF) was adopted in the late 1980s as a financial tool to evaluate the firm and its individual projects. We question the procedure of calculating the FCF where a significant portion of Current Liabilities is offset against Current Assets, thereby creating the hybrid asset Net Working Capital (NWC). Borrowed from accounting methodology, that procedure distorts the FCF size, composition, volatility, and estimated value. Our empirical analysis shows that the nature and extent of those distortions can misinform the firm's stockholders, lenders and borrowers, and investors at large. We propose a revised FCF that would avoid those distortions.

Keywords: Financial reporting; Free Cash Flow; Net Working Capital; Cost of capital; Corporate valuation; Investment decision (search for similar items in EconPapers)
JEL-codes: G30 G31 G32 G35 G38 H32 K22 L21 M14 M40 M41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:29:y:2016:i:c:p:1-11

DOI: 10.1016/j.gfj.2015.05.003

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