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Free cash flows: Primary drivers

What drives free cash flows and how can investors use this understanding to pick winning stocks?

Free cash flows: Primary drivers

The valuation of any business is the net present value of all expected free cash flows in future. As a result, for every business, an investor needs to build their expectation of the quantum of growth and the longevity of growth in free cash flows. This is a universal concept that applies to every business. However, what is not common across businesses is the primary driver of free cash flows (which particularly affects the quantum of growth in free cash flows). Consider the following examples.


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