Why Free Cash Flow

So actually before I get into making projections, I wanted to step back for a second and review what exactly free cash flow is and why we use it.

When I think about investing, I take it from the perspective of a business owner. As a business owner, my focus as far as returns is on the actual cash that I could take home after all the (cash) expenses of running the company have been paid. This is what we're trying to get a look at with free cash flow.

If we take the classic lemonade stand example, we're talking about how much cash is left over from our sales after taking care of all the costs of the business such as buying lemons, paying the person making the lemonade, and making repairs and upgrades of the physical stand. Then whatever cash is left over after all of that is done... well, that's our free cash flow.

Doing a discounted cash flow calculation basically tallies up all of the cash (discounted to what it's worth to us today) that we can expect to collect from this business over the next x number of years. The value we get from this should give us a pretty good approximation of what the business in question is worth.

-AvgJoe