Company’s operating assets and free cash flow as a source of profit

Abstract

The purpose of this paper is to show how to calculate free cash flow and how to determine operating (production) assets for the company, because these assets generate company‘s free cash flow. Company‘s free cash flow is generated from operating profits, accrued depreciation and changes in working capital. The paper also considers company‘s working capital and its changes.

In this article, the author considers the interpretation of the results of the analysis and management of operating assets and free cash flow, which are important aspects of the firm‘s financial management and interpreting financial analysis results. Their importance is justified, in particular, by the fact that operating assets and free cash flow are the sources of profit creation for the company.

The article is topical, because it shows that the generally accepted opinion of financiers, that the source of operating profit are company‘s assets, which are accounted at book value is not entirely correct – in reality the source of operating profits are company‘s assets, which are accounted at their initial value.

The author also shows that operating free cash flow is not the same as cash flow from operations, therefore when analysing the operations of a company for financial management, it is important to correctly interpret the information of financial reports for financial management and study those positions, which provide the necessary and important information for taking managerial decisions.

The calculations are done using the data of hypothetical companies, they illustrate how to determine free cash flow in practice, cash flow from operations, analyse these indicators and make correct conclusion. The paper also suggests measures shareholders have to take so that the company does not suffer the shortage of cash in its current operations.