Last time I have discussed which methods exist to value a firm and this time I give you a small introduction in what the free cash flow is and why is it important for the valuation of the firm based on the internal data. Here we go about Mergers and Acquisitions Law – why is free cash flow important?
My intention is to highlight the main aspects of this method, which are usually taken for granted and sometimes are paid less attention to. So, let us now focus on the internal method.
Now I want to focus your attention on why we work with the free cash flows for determining the value of a firm and not with the profits the company is making when trying to determine its value.
Cash flow creates a great deal of confusion to many especially those who are new to the subject of corporate finance. People tend to think that profit is the key to measuring value creation in a company or a project, not least because such a concept is widely known. On the other hand, while many have heard of the proverb “Cash is King”, only few can explain its significance.