Earnings in the income statements of companies can sometimes be misleading. Many celebrated investors like Warren Buffett have argued in favour of using free cash flow over other criteria.
- Free cash flow gives an idea about the cash position of the company by subtracting the investments from the cash generated from operations
- Free cash flow is very transparent as it reflects the exact cash position of the company, making valuation easy and simple
- This smallcase consists of cash-rich companies that are growing their free cash flow and reducing debt burden, yet are available at lower valuations