You're an investor. You just found the stash of gold bars your great-grandfather buried in the backyard when he thought the communists were planning an imminent invasion. You've decided to sell the gold and invest the cash into the stock market.
When judging the financial health of most companies, a key metric is "earnings per share," or "EPS." It takes the company's accounting profit line and divides it by the number of shares outstanding.
That figure works for most companies. However, it doesn't provide much information about a category of firms known as Real Estate Investment Trusts, or REITs. These firms operate in the real estate business. They might own shopping malls, or office buildings; they make their money by buying real estate and collecting rent.
Because of the nature of the business and the legal requirements related to maintaining REIT status, EPS doesn't provide a good gauge of the company's bottom line for investors trying to evaluate these real estate-centered companies. Many REITs take advantage of leverage (debt) and other odd accounting tricks to minimize taxes, thus showing less in profit and saving IRS checks. Instead, "funds from operations" becomes the key stat for most REITs.
FFO measures the cash flow a REIT generates from operations. It includes earnings, along with depreciation and amortization, but leaves out any gains the company may have registered from sales of real estate. For investor purposes, it is usually presented as a per-share number, similar to EPS.
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Finance: What is free cash flow?13 Views
Finance allah shmoop what is free cash flow Well it's
the cash a company produces and pretty much after everything
like whatever dot com has one hundred million bucks in
pre tax profits A tax bill of thirty milton at
them seventy million dollars in earnings But they also had
depreciation on their whatever stamping factory of ten million dollars
So in fact they generated eighty million dollars in cash
while having seventy million in earnings And no there were
no tricky things done in the year to draw down
inventory volumes to produce a lot more cash or any
other chick a nunnery here The company also has committed
to paying a dividend of five milic order or twenty
mil a year That dividend payment gets included in the
free cash flow calculation as well So after eighty million
in cash production from operations the dividend the company pays
out to shareholders then is taken out of that eighty
So the free cash number Yep sixty million bucks And
why does this number even matter Well if you go
old school on investing and think about what a share
of a given company buys you in the form of
earnings and cash or dead on the balance sheet this
year Next year in the next you can think of
whatever dot com in terms of having a free cash
flow yield That is if the company was valued at
a billion dollars and it had one hundred million dollars
of cash and one hundred million dollars of dead zero
net cash or debt And yes this is oh so
theoretical Well then the company would have a six percent
free cash flow yield right because it's generating sixty million
after everything over a bill so that sixty mill is
the free cash flow But investors get the free cash
flow in some form most likely justin accumulation of cash
on the balance sheet and then they also get another
twenty mill in dividends So add to that twenty million
dividends and assuming you get no growth or decline while
investors or buying in it a billion dollar valuation while
they be getting a total of eight percent of their
cash back in one form or another each year either
in just cash produced by the company free castle and
or that dividend or set another way the sixty million
free cash flow would presumably then just accumulate on the
balance sheet Adding value to the company is cash piled
up or would be used wisely in one form or
another presumably like to buy back stock or by competitors
or whatever other whatever's The key idea here is that
free cash flow is truly free It's not encumbered It
is an ode for dividends or other big sinking fund
obligations This year or other things it's free and available
for the company to do You know whatever they want 00:02:26.105 --> [endTime] with
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