Cash flow, in investing terms, usually just means
EBITDA
— a measurement of earnings that focuses just on the profitability
of the company's business operations before interest, taxes, and
other accounting expenses. But
free cash flow is quite different. While EBITDA leaves
out a large number of expenses, free cash flow addresses every
expense that results in a payment out of the company's coffers.
In essence, free cash flow subtracts all cash
expenses from all the cash that comes in from revenues, investments,
and other items to see what, if anything, is left over. Many investors
and analysts see free cash flow as a better measure of a company's
health and future worth than EBITDA, because free cash flow calculates
the money that can be used to pay dividends or that the company
can reinvest in the business. Some analysts also believe that
free cash flow is a more dependable measure than EBITDA, because
free cash flow also accounts for the risks that may come with
a company's debt.
Sam Stovall,
Chief Investment Strategist at Standard & Poor’s
Sam Stovall,