DEFINITION of Trailing FCF
Trailing FCF (free cash flow) measures the company's free cash flow for a prior period. The previous 12 months' cash flow is a commonly used figure, as it measures the cash flow to the firm generated over the course of the past year. Trailing FCF is used by investment analysts in calculating a company's free cash flow yield.
BREAKING DOWN Trailing FCF
Trailing FCF is important to investors because it shows how much money a company has brought in over the last year, after subtracting capital expenditures. It is calculated by starting with the previous 12 months' earnings before interest and taxes (EBIT), then multiplying it by [1-(the firm's tax rate)]. Depreciation and amortization expenses that have been subtracted over the period are then added back to the product. Changes in working capital and capital expenditures incurred over the period are then subtracted.
The more free cash flow a company has, the more easily it can pay its creditors and investors and reinvest in itself. A strong trailing free cash flow multiple can be a sign that a stock is a good investment when combined with other signs of financial strength, such as increasing revenues, order and sales growth, controlled SG&A costs, increasing gross profits and solid earnings per share.