5 Companies With Huge Free Cash Flow (FCF)

Many investors try to identify companies they believe will be around for the long haul before making significant investments. They hope that, if the stock of any of these companies takes a nosedive, it will only be a matter of time before it rebounds.

One way to identify a company with these characteristics is to look for companies with major free cash flow (FCF). FCF is the cash flow available to a company that can be used to repay creditors or pay dividends and interest to investors. Some investors prefer to pay attention to this aspect of a company’s financials, rather than earnings or earnings per share, as a measure of its profitability.

Key Takeaways

• Companies with major free cash flows are likely to rebound—even after their stocks nose dive.
• Free cash flow is the cash flow that can be used to repay creditors or pay dividends and interest to investors.
• Some investors pay attention to free cash flow rather than earnings as a measure of profitability because it can’t be manipulated.

Why Is Free Cash Flow?

Free cash flow is a financial metric that can give people insight into a company’s financial health and well-being. It represents the amount of money left after a company pays for its capital expenditures (CapEx). This figure lets investors and analysts know whether a company is able to pay off its short-term debts.

Revenue and earnings are both important metrics, but both can be manipulated. For example, retailers can manipulate revenue by opening more stores. Earnings can be skewed by corporate buybacks, which reduces the share count and, ultimately, improves earnings per share (EPS).

Investors should never overlook a company’s FCF because, unlike revenue and earnings, cash flow can never be manipulated. In addition, a company with a good amount of FCF may also be more likely to make dividend payments and engage in buybacks, acquisitions for inorganic growth, and innovation for organic growth. Not to mention that free cash flow also provides opportunities for debt reduction.

If a company has a large FCF, it means it has more maneuverability. This can allow for positive growth during economic booms and flexibility during an economic downturn, regardless of whether those bad times are related to the broader market, the industry, or the company itself.

Important

While FCF is an important metric, it’s still only one of many metrics. It’s also important to consider if a company has been growing its top line and is consistently profitable, as well as the company’s debt-to-equity (D/E) ratio, one-year stock performance, and dividend yield.

Who Has Major Free Cash Flow (FCF)?

Here are five examples of companies that have historically shown large free cash flow figures. All five of these companies are also household names. This factor can play a big role in a company’s staying power because of the level of consumer trust these brands have garnered. The figures listed in the chart below are current as of Dec. 5, 2024, according to YCharts.

Keep in mind that although all five of these companies have been consistently profitable, not all of them have delivered consistent revenue growth in the same time frame. A high D/E ratio is usually a negative sign, but when a company has a strong cash flow generation, it can minimize the debt risk.

How Do You Calculate Free Cash Flow?

Free cash flow is a financial metric that points to a company’s financial health and well-being. It represents how much cash a company earns after deducting its working capital needs, including the purchase of equipment. FCF tells investors whether companies can fulfill their financial obligations.

To calculate FCF, subtract capital expenditures from a company’s operating cash flow.

Why Is Free Cash Flow Important?

Free cash flow is the cash generated by a company after accounting for working capital needs. Investors and analysts look at a company’s free cash flow to see how financially sound it is because it indicates whether the company can pay its debts—notably those that are due within the short term.

What Factors Influence Free Cash Flow?

A company’s free cash flow is the total amount of cash a company has after it pays for working capital needs, including the purchase of property, plant, and equipment (PP&E). The three factors that affect free cash flow are working capital, operating cash flow, capital expenditures, and revenue growth.

The Bottom Line

The five free cash flow monsters above should be considered for further research, but only if you’re a long-term investor. There are many questions in markets about the global economy right now and no stock is invincible. However, if history continues to repeat itself, then the five stocks above should be safer than most. 

Dan Moskowitz does not have any positions in AAPL, VZ, MSFT, WMT, or PFE.