The Importance of Free Cash Flow in Financial Analysis

May 30, 2023 | Finconomics 101, No Bull Economics

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Cash represents the lifeblood of all business enterprises which is why it is important to analyze free cash flow which we define as operating cash flow minus capex, dividends, and stock buybacks. We illustrate DoorDash as an example of why cash flow analysis is so important. 


  • Net income does not provide an accurate portrayal of a company’s actual profitability or cash flow because of accruals & non-cash charges (including depreciation). For instance, it is possible that a company reports a big increase in sales, but this may only translate into a higher account receivables position if the company has difficulty collecting payment for these sales. On the other hand, depreciation expenses depress both earnings & taxes even though they are non-cash charges.
  • An analysis of a company’s cash flow statement adjusts net income for these sorts of considerations to calculate a line item called “Net cash provided by operating activities”. In turn, we like to adjust operating cash flow (OCF) by capital expenditures (capex), dividends, and stock buybacks to calculate free cash flow (FCF).
  • Not only does a company generating strong FCF have the where-with-all to withstand economic downturns, but they also can fund growth. Further, we can learn a lot about a company by observing its use of OCF – is it using cash to fund internal investments (capex) or is it simply buying back its stock & paying dividends to reward shareholders?
  • DoorDash provides a classic example of why it is so important to analyze cash flow. As we can see below, the company has been racking up steadily higher net income losses which reached -$1.4B in 2022. However, the cash flow statement reveals that these losses reflect steady increases in non-cash stock-based compensation that grew dramatically to $889MM in 2022 (hopefully this investment in human capital will generate a high ROI). Adjusting for this, we can see that DoorDash’s cash generation has been sufficient to fund its capital expenditures (capex). All the same, we see the company used $400MM from cash on its balance sheet to buy back stock during 2022 – a corporate action more typical of a mature industry player than a growth company.         
Doordash FCF Chart
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