Month: October 2021


Why can’t the world of ­finance be simpler? Let’s think about a simple version of capital markets. On one side, there would be individuals and households that have savings that they want to invest. These are people like you and me who want to save for college or retirement and want to use that money to generate a return. On the other side are companies that need capital to build new projects and grow. So, a simpler ­financial world would just have the savers and ­firms, and we wouldn’t need the mess of ­finance that exists in the middle.

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­Finance professionals look to the future for the most important questions regarding the value implications of any decision. In short, the source of all value today is future performance as manifested in cash-flows.

Would you be indifferent to a dollar received today and a dollar received in ten years? Clearly, no. So, ­finance prescribes thinking about the free cash-flows an asset will generate in the future and figuring out what they are worth now.

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The ­final cash measure is free cash-flows, one of the most important measures of economic performance in ­finance. You’ll see this number again and again when you look at how companies are valued or when companies discuss how they’re doing. The equation for calculating free cash-flows provides a measure of the amount of cash-flows truly unencumbered by the operations of a business. It’s the purest measure of cash and forms the basis of valuation. It removes the distorting effects of non-cash charges such as depreciation and amortization (like EBITDA), accounts for changes in working capital (like operating cash ‑ow), and fi­nally, acknowledges that capital expenditures are required for growth and have been avoided so far. In short, free cash ‑ow isolates the cash that is truly free to be distributed or used however the company sees ­fit.

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