Free Cash Flow as Decision Lens

“Tisch took the candy store approach. How much money was left over that didn’t have to be reinvested in the store to keep the cuS' tomers coming and the money rolling in? He called it free cash flow. “Profits that have to be reinvested in more capital outlays may not re- ally be profits at all,” he said. Companies routinely list as an asset money spent on upgrading factories and equipment—sO'Called capital spending. They call it reinvesting profit. The rationale is that if the owner decides to sell the candy store, the expanded shop will fetch that much more because it’s bigger and better. But Tisch believed such expenses were part of the cost of generating sales.”

““More and more, a big company has to go on spending money just to maintain its existing earnings stream. Isn’t that really an expense, rather than something that should be considered as a true increase in value?” Tisch said. “In what we call ‘smokestack America’ there often isn’t any accumulated free cash after capital outlays. The companies in many cases aren’t really making money.””