Just as your pulse is checked during a routine physical, free cash flow is used as an indicator of a company's health. It equals the cash brought in from operations minus the money needed to pay the bills. Think about leftover money in your checking account after you pay this month's bills.

Investors and analysts see this leftover money as a gauge of a company's ability to perform. It is available for transactions such as handing out dividends and working on new products.

Some argue free cash flow is wrongly overshadowed by the emphasis often placed on earnings. Earnings numbers can be manipulated and don't always tell the whole story -- and earnings don't mean much if there's nothing left over after a company pays its expenses. Even if you bring in a six-figure salary, but no money left after paying the bills, are you in great financial shape?

You don't have to be Einstein to figure out free cash flow. To calculate the number, subtract the company's expenditures and dividends from its operating cash flow.

If the free cash flow is written in red ink, it doesn't necessarily signal curtains. This is common for young companies looking to grow. It also could be a result of heavy investments, which in the long run could be worth a standing ovation.

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Sunday, October 05, 2008

Credit Freeze Spreads Overseas

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One of the most worrisome aspects of the global financial crisis – the reluctance of banks to lend to each other – is starting to cause havoc throughout Europe, as country governments rush to backstop ailing financial institutions and preserve public confidence in the financial system.

Germany on Sunday said it plans to guarantee all private savings accounts, following a move by Ireland last week to guarantee all bank deposits. Those actions drew criticism from European Union Competition Commissioner Neelie Kroes, who said it would be "discriminatory" to do so -- though she said Ireland is trying to change its plan to conform with EU rules.

According to media reports, Greece, Britain, Denmark and Austria had also taken, or were planning to take, measures to increase their deposit guarantee limits.

Also, a number of bank backstops were announced around the Continent, even after the leaders of the U.K., Italy, France and Germany held a meeting in Paris to discuss how to deal with the crisis.

The German government arranged a bailout of property lender Hypo Real Estate Holding, which had been in trouble for a number of days and already was to receive a EUR35 billion loan facility from the German lenders and government. It will now get an additional EUR15 billion loan from German banks and insurers.

In Italy, UniCredit announced that it would seek an emergency EUR3 billion capital raise, a decision reached at a board meeting Sunday. UniCredit's CEO had made a television appearance several days prior to assert that the company was financially solid, but The Wall Street Journal said executives decided to call the meeting after the bank's stock sank markedly.

Dutch-Belgian bank Fortis was getting parceled out, too. Instead of buying the previously agreed 49% of Fortis's Belgian operations, that country's government is buying all of it, and then will sell 75% of that unit to BNP Paribas for EUR8.25 billion of new BNP shares, the Journal reported. On Friday, the Netherlands nationalized Fortis's operations there.

Amid all the actions being taken, one concern is that Europe seems to lack unity in dealing with the financial turmoil. There were reports that some countries were annoyed not to have been included in the Paris meeting; and even the arguments about bank-deposit insurance levels highlight the level of tension as officials try to figure out what to do.