Course 208: What Is Free Cash Flow?
When Spending Doesn't Generate Cash Flow
In this course
1 Introduction
2 What Free Cash Flow Tells You
3 Big Spending and Cash Flow Can Work Together
4 When Spending Doesn't Generate Cash Flow
5 Using Free Cash Flow

At least Rainforest Cafe has grown rapidly (though not as rapidly as the market had hoped). What really hurts is when a company spends aggressively but its performance stinks. If a company is spending like mad, it had better be increasing its sales--and its profits--at a rapid clip. Intel and Rainforest Cafe pass that test. Electronics manufacturer Hitachi HIT doesn't. Its earnings in 1996, 1997, and 1998 totaled $1,473 million, $787 million, and $28 million, respectively. Its free cash flows, on the other hand, were negative $2,532 million, negative $2,347 million, and negative $2,187 million. For a mature company like Hitachi to generate such meager free cash flows is bad enough. But when a company spends an amount equal to about 20% of its long-term assets in a single year, you expect to see rapid growth. Yet Hitachi's revenues actually declined during this period; the company's long-term record of growth is poor when you consider how much money gets plowed into the company.

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