Revenues and earnings are nice numbers to quote, but often free cash flow (FCF) is a more valuable number for investors when evaluating a business. FCF can be a very powerful tool when evaluating a business. One area where FCF can hamper one’s investment analysis is when a business engages in a major capital project. The capital expenditures will be taken from the FCF value and could possibly drop FCF significantly quarter from a previous quarter.
To work around this weakness of FCF evaluation, it is sometimes more applicable to look at a company’s operating cash flow (OCF). OCF does not take into account capital expenditures and thus will provide a clearer picture of any changes in cash from actual operations.
When a company is growing capital expenditures can be very high. Such activity will drive down FCF. Under the assumption that the capital expenditure are being spent wisely, you would not want to hold such actions against a company. Therefore, focus on OCF when you know new capital intensive projects are going on.