What Is Free Cash Flow Analysis?
Free cash flow (FCF) is the cash remaining after a company pays for operating expenses and capital expenditures. Unlike net income, FCF cannot be manipulated through accounting choices — it represents the actual cash available to reward shareholders through dividends, buybacks, or reinvestment.
Why It Matters
The cash conversion ratio (FCF / net income) reveals earnings quality. A ratio consistently above 1.0 indicates high-quality earnings that convert to cash. A ratio below 0.7 suggests aggressive revenue recognition, capitalized expenses, or working capital management that inflates reported earnings.
How LyraIQ Approaches This
LyraIQ's cash flow analyzer computes FCF, unlevered FCF, and cash conversion ratios over 10 years. The system identifies companies with deteriorating cash conversion, flags capital expenditure spikes that may indicate unsustainable growth, and calculates FCF yield for valuation comparison.
Practical Steps
- Calculate FCF = Operating Cash Flow - Capital Expenditures
- Compute cash conversion ratio = FCF / Net Income
- Track FCF trends over 5 years — declining FCF with rising net income is a red flag
- Compare FCF yield (FCF / Market Cap) to earnings yield for valuation
- Check if capex is maintenance or growth — growth capex is investment, maintenance is cost