Headline earnings can be a useful metric to determine a company’s worth, but it can be tweaked. Cold, hard cash, on the other hand, often tells a more honest story
19 June 2025 - 05:00
bySimon Brown
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The old saying is that cash is king, and the best way an investor sees this is via dividend payments. But there are other ways to check the cash in a company; let’s dig into some of those.
My favourite is free cash flow per share, which is essentially operating cash flow (found on the cash flow statement) less capital expenditure. You then divide this by the number of shares in issue to get free cash flow per share.
Ideally, that should be a positive number, which means that the business can pay down debt, pay dividends and grow. But even when the number is negative, it’s not necessarily the end of the world — if the company is investing for the future. Of course, there’s a risk then that the business runs out of money or the future is not as bright as expected.
So, free cash flow is at the heart of a company, and the more it produces every year, the better.
Then I like to compare free cash flow against other metrics such as headline earnings, dividends and revenue.
What I really want to see is what the trend looks like over a few years. Is it positive? If not, why not? I’ll also compare the business against its peers in the sector using their free cash flow figures. Again, I am looking for a trend to see which business is doing better relative to its peers. This is particularly helpful when you’re considering two stocks for your portfolio but are undecided on which to include. The company with more free cash flow would likely be the better option.
I also consider free cash flow per share a more useful metric than headline earnings, as those can have all sorts of tweaks, whereas cash is cash. Free cash flow per share can be compared to the share price and tracked, much as you use the p:e ratio to determine a company’s valuation.
Another way is to look at free cash flow vs current liabilities, which are liabilities that need to be paid off in the next 12 months. This can show whether the company is about to hit a cash crunch and will need extra cash to pay these liabilities. The extra cash could come from revenue or new debt; it needn’t be as extreme as a rights issue. This metric shows how well a company is managing cash.
Companies exist to create wealth for the owners, and that wealth is best driven by free cash flow. A company struggling to produce free cash flow is likely to have problems unless it changes its business model. A business with strong free cash flow is always in a stronger position, especially when tough times arrive.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
SIMON BROWN: Why free cash flow is king
Headline earnings can be a useful metric to determine a company’s worth, but it can be tweaked. Cold, hard cash, on the other hand, often tells a more honest story
The old saying is that cash is king, and the best way an investor sees this is via dividend payments. But there are other ways to check the cash in a company; let’s dig into some of those.
My favourite is free cash flow per share, which is essentially operating cash flow (found on the cash flow statement) less capital expenditure. You then divide this by the number of shares in issue to get free cash flow per share.
Ideally, that should be a positive number, which means that the business can pay down debt, pay dividends and grow. But even when the number is negative, it’s not necessarily the end of the world — if the company is investing for the future. Of course, there’s a risk then that the business runs out of money or the future is not as bright as expected.
So, free cash flow is at the heart of a company, and the more it produces every year, the better.
Then I like to compare free cash flow against other metrics such as headline earnings, dividends and revenue.
What I really want to see is what the trend looks like over a few years. Is it positive? If not, why not? I’ll also compare the business against its peers in the sector using their free cash flow figures. Again, I am looking for a trend to see which business is doing better relative to its peers. This is particularly helpful when you’re considering two stocks for your portfolio but are undecided on which to include. The company with more free cash flow would likely be the better option.
I also consider free cash flow per share a more useful metric than headline earnings, as those can have all sorts of tweaks, whereas cash is cash. Free cash flow per share can be compared to the share price and tracked, much as you use the p:e ratio to determine a company’s valuation.
Another way is to look at free cash flow vs current liabilities, which are liabilities that need to be paid off in the next 12 months. This can show whether the company is about to hit a cash crunch and will need extra cash to pay these liabilities. The extra cash could come from revenue or new debt; it needn’t be as extreme as a rights issue. This metric shows how well a company is managing cash.
Companies exist to create wealth for the owners, and that wealth is best driven by free cash flow. A company struggling to produce free cash flow is likely to have problems unless it changes its business model. A business with strong free cash flow is always in a stronger position, especially when tough times arrive.
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