Earnings, dividends, and asset values tend to get the most attention when it comes to stock price valuation. While they are important factors, a company’s ability to generate cash will eventually fuel growth in those factors. Due to differences in accounting practices across companies, slight variations in earnings calculations can make it difficult to track true earnings growth over time and compare figures between firms. On the other hand, free cash flow measures the cash a company generates after paying capital expenditures and dividends.
The components needed to calculate free cash flow are reported in a statement of cash flows that companies are required to file each quarter and fiscal year when filing their income statement and balance sheets.
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