Definition:

1-year Free Cash Flow Growth Rate measures the percentage change in a company's free cash flow over a one-year period. It indicates how quickly a company's free cash flow is increasing or decreasing, providing insight into its financial health and operational efficiency.

Formula:

((Free Cash Flow in Current Year - Free Cash Flow in Previous Year) / Free Cash Flow in Previous Year) * 100

How to use the metric:

Investors and analysts use the 1-year Free Cash Flow Growth Rate to assess a company's ability to generate cash from its operations over time. A positive growth rate suggests improving financial health and potential for reinvestment, debt reduction, or shareholder returns. It is often used in conjunction with other financial metrics to evaluate a company's performance and growth prospects.

Limitations:

The metric can be volatile due to short-term fluctuations in cash flow, which may not accurately reflect long-term trends. It can also be affected by one-time events, such as asset sales or large capital expenditures, which may distort the growth rate. Additionally, it does not account for industry-specific factors or economic conditions that might impact cash flow.

Applies to:

The metric is useful across various industries, particularly those with significant capital expenditures, such as manufacturing, technology, and utilities, where cash flow management is crucial for operations and growth.

Doesn't apply to:

Industries with highly volatile or unpredictable cash flows, such as startups or sectors heavily reliant on external financing, may not find this metric as applicable. In these cases, cash flow can be erratic and not indicative of long-term performance.

Summary:

The 1-year Free Cash Flow Growth Rate is a valuable tool for assessing a company's financial health and operational efficiency by measuring changes in free cash flow over a year. While it provides insights into cash generation capabilities, it should be used alongside other metrics and with consideration of industry-specific factors and potential short-term distortions.