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.

Home / Markets

Tuesday, August 26, 2008

New Home Sales Jump 2.4% in July

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WASHINGTON--Sales of new homes posted an unexpected gain in July as heavily discounted properties enticed cautious house hunters to become home buyers.

The Commerce Department reported that sales of new single-family homes rose by 2.4% last month to a seasonally adjusted annual rate of 515,000 units, the most since April.

But sales in June turned out to be much weaker than the government previously estimated. Sales sank to a pace of just 503,000, the worst showing since September 1991. June's sales were initially reported to have clocked in at a pace of 530,000.

Economists were forecasting sales to drop in July, although they expected the pace to have been around 525,000. Given June's sharp, downward revision, the level of home sales in July turned out to be less than analysts were anticipating.

Even with the over-the-month increase, new-home sales are down a whopping 35.3% from last July, underscoring just how much the housing market has eroded.

Home prices also continued to sag.

The average price of a new-home sold in July was $294,600, down 4.1% from a year ago. The median home price -- where half sell for more and half for less -- was $230,700, down 6.3% from last year.

Fallout from the housing crisis is one of the biggest problems facing the country. It has figured prominently into the economy's sharp slowdown. Foreclosures have climbed to record highs, financial companies have chalked up multibillion-dollar losses, and home builders have been clobbered.

Earlier this month, Horsham, Pa.-based homebuilder Toll Brothers Inc. reported dismal third-quarter results as its revenue fell 34% and its order backlog plunged 52%. Atlanta-based Beazer Homes USA Inc. also reported a difficult third quarter, as revenue fell by 40%.

Consumers have watched their single-biggest asset slump in value, making them feel less wealthy and less inclined to spend.
A growing number of analysts believe the economy will hit another deep pothole later this year as the bracing effects of the government's tax rebates fades.

The Federal Reserve, however, can't afford to slice interest rates further to bolster the fragile economy out of fears it will worsen inflation. The Fed in June ended its most aggressive rate-cutting campaign in decades. Economists believe the Fed will leave rates alone when it meets next on Sept. 16, as well as through the rest of this year.

Even with the government's housing-rescue package signed into law by President Bush last month, foreclosures are expected to keep rising into next year.

Meanwhile, there's questions about the future ability of mortgage finance giants Fannie Mae and Freddie Mac to supply money for home loans. The two companies have cut back the availability of mortgages as they cope with growing losses from foreclosures. The companies' stocks have been hammered recently as investors become increasingly convinced that a government bailout will be needed.