Distinguishing Revenue and Free Cash Flow

Revenue and free cash flow are both important financial metrics used to evaluate the performance and health of a company, but they represent different aspects of a company's financial operations.

• Revenue:

  • Revenue, also known as sales or turnover, represents the total income generated by a company through its core business activities. It's the top line of the income statement.

  • Revenue is the total amount of money received by the company from selling its products or services to customers.

  • Revenue does not account for expenses incurred in generating that income, such as production costs, operating expenses, taxes, interest, and depreciation.

• Free Cash Flow (FCF):

  • Free cash flow is a measure of a company's financial performance that represents the cash generated by the company's operations after accounting for capital expenditures needed to maintain or expand its asset base.

  • FCF is calculated by subtracting capital expenditures (CAPEX) from operating cash flow.

  • FCF represents the cash available to the company for various purposes, including investing in growth opportunities, paying dividends, repurchasing shares, paying off debt, or accumulating cash reserves.

  • It's a measure of a company's ability to generate cash from its operations that is not needed for maintaining or expanding its asset base.

In summary, revenue reflects the total income generated by a company's business activities, while free cash flow represents the cash generated by those activities after accounting for expenses and capital expenditures. Free cash flow provides insight into the cash-generating ability of a company and its financial flexibility, whereas revenue indicates the scale of business activity.

See also Bookkeeping, Financial Statements, Reg. S-X, Revenue, Total Enterprise Value, Book Value, Distinguishing Revenue and Free Cash Flow, and Distinguishing Revenue and FFO.