Most of the investors focus on earning per share (EPS). But there is another indicator of company’s prospect and growth, which is FCF (Free Cash Flow). This is because EPS is said to be exposed to manipulation and may not accurate represent how much cash a business has at its disposal. FCF is a key component because it is a much more accurate measure of how much cash a business actually generate after it meets the necessary expenses of its operations and invest in future growth. It is a measure of how much cash a business has to service debt, pay dividend, invest in operations or buy back shares.
 
Companies with high FCF are likely to deploy that excess cash for the capital expenditures necessary to grow their business. A rising levels of cash flows is a good indicator of future earnings gains. For instance, Incitec Pivot Ltd (ASX: IPL) is making efforts to strengthen their cash flow by controlling costs and aiming for another $35 million annual cost cut from 2019 at its Phosphate Hill plant. Accordingly, Incitec Pivot has undertaken action by accelerating BEx projects. The company has delivered $16 million and has targeted 84 million, i.e., of $100 million in sustainable operating cost and cash savings by 2017. Crown Resorts Ltd.’s (ASX: CWN) net operating cash flow for the period reached $482.7 million for fiscal year of 2016.
 
For income investors, FCF is an indicator of company’s ability to maintain its dividend or even increase its payout. But in case of Incitec Pivot, they slashed their dividends for 2016 as the company faced a lot of operating challenges. However, Crown Resorts Ltd intends to pay 100% dividend of normalized net profit after tax (before minorities and excluding profits from associates but including dividends received from associates). For the full financial year ended 30 June 2016, a final dividend reached 39.5 cents per share, franked to 70% leading to overall dividend for the year to 72.5 cents per share, which is an increase by 96% against 2015 total dividend per share. The group has earnings quality and has shown an impressive growth profile.
 
On the other hand, the negative cash flow not necessarily means the company is facing problems or not growing. This however is expected to put a cap on the dividend payouts. Same time the positive cash flow with declining trend may also indicate for a cut in dividend in near future. We need to be careful while selecting the companies with good cash flow as one criteria. Most mature companies are able to generate excess cash. Comparing free cash flow generated per market or enterprise value provides an excellent way to assess the value of several mature companies. Companies that invest back into the business to fuel growth generally see the benefits in terms of future growth.

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