What is Free Cash Flow a Trader Asked me today?, here is my answer.

• Operating cash less investment.
• Cash flow is derived from subtracting the prior quarter balance sheet from the most recently reported balance sheet.
• Cash from operations does not include cash generated by all investments or financing.
• Subtracting cash used to make PP&E investments from operating cash flow results in FCF.

As companies incur costs or  generate revenues that are recognized in the future on a cash basis, like deposits for Tesla (Cash Positive) or Content purchases for Netflix (Cash Negative), cash is generated and consumed.

FCF provides a measures the cash health of Netflix. Comparing FCF to EPS or EBITDA provides a measure of earnings quality. Typically FCF that is 75% or greater than EBITDA is higher quality. Slow growth companies with little debt will have EPS that approximates FCF. Companies that have zero coupon convertible debt or a big non cash write down could have FCF that is greater than earnings.

In the case of Netflix FCF is very negative about $600 million a quarter on average. EPS compares poorly to FCF as EPS shows Netflix making $0.55 quarter where they lost $2 a share on a FCF basis.

Below: Netflix’s Income Statement says they made a profit $300 million in the 1H17A. Netflix’s FCF statement says they made a cash loss, $1.6 billion in 1H17. If I were Disney I would be concerned about getting paid the $1.8 billion I am owed in 2019 and plan for that contingency. https://ir.netflix.com/

There is a prisoner’s dilemma facing the industry and DIS just made the first choice that all will make, maybe.

Act against Netflix

Act with the industry

Do Nothing