1. Free Cash Flow
Cash (as you can see in the balance sheet above) is what a business holds in banks and other investments. But the concept of free cash flow (FCF) is entirely different.
FCF is what a business is left with at the end of every year after it takes care of its capital expansion and working capital needs. So if you look at the cash flow statement in the previous slide, the FCF will be calculated as:
FCF = Cash flow from operations – Capital expenditures
= Rs 3055.79 cr – Rs 722.13 cr
= Rs 2333.66 cr
In simple terms, FCF tracks the money a business has generated by the end of each year. It’s the cash that is left over with the company at the end of the year, after it pays all its bills and pays for any new capital expenditures. It is what it has left over to pay investors. And that is why FCF is one of the most important numbers you must track as a shareholder in a company.
2. Return on equity
Return on equity, or ROE, is one of the most useful tools to determine how well management creates value for shareholders. The formula is:
ROE = Net profit / Equity
The legendary investor, Warren Buffett believes that the return that a company gets on its equity is one of the most important factors in making successful stock investments.
Higher the ROE, indicates
Cash (as you can see in the balance sheet above) is what a business holds in banks and other investments. But the concept of free cash flow (FCF) is entirely different.
FCF is what a business is left with at the end of every year after it takes care of its capital expansion and working capital needs. So if you look at the cash flow statement in the previous slide, the FCF will be calculated as:
FCF = Cash flow from operations – Capital expenditures
= Rs 3055.79 cr – Rs 722.13 cr
= Rs 2333.66 cr
In simple terms, FCF tracks the money a business has generated by the end of each year. It’s the cash that is left over with the company at the end of the year, after it pays all its bills and pays for any new capital expenditures. It is what it has left over to pay investors. And that is why FCF is one of the most important numbers you must track as a shareholder in a company.
2. Return on equity
Return on equity, or ROE, is one of the most useful tools to determine how well management creates value for shareholders. The formula is:
The legendary investor, Warren Buffett believes that the return that a company gets on its equity is one of the most important factors in making successful stock investments.
Higher the ROE, indicates
- that the management has allocated capital (equity) in a profitable way.
- that surplus funds can be invested to improve business operations without the owners of the business (shareholders) having to invest more capital.
- that there is less need to borrow, which is a positive sign for the business
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