Free Cash Flow is the key indicator of company health

The single most important indicator of company health is Free Cash Flow, or Free Cash Flow Yield. This figure is the amount of cash profits generated by the business after taking into account maintenance and expansionary capex. Alternatively, it is the amount left over from profits that are available to shareholders which can then be paid as dividends, after taking into account the additional capital required for sustainable growth. A healthy Free Cash Flow Yield (free cash flow divided by market cap) would be a number north of 7%. Companies that consistently generate strong free cash flow and grow this figure from year to year are good companies to be invested in. This free cash flow can be reinvested back into the business or returned to shareholders. Some companies don’t generate any free cash flow and can remain like this for many years. Under this circumstance, balance sheet debt may grow and/or shareholders will be called upon to inject capital into the company. This situation is only sustainable for so long, before the banks and shareholders pull their support.