Definition:

The 10-year Free Cash Flow Growth Rate measures the annualized percentage increase in a company's free cash flow over a ten-year period. Free cash flow is the cash generated by a company that is available for distribution to its security holders.

Formula:

((FCF in Year 10 / FCF in Year 1) ^ (1/9)) - 1

How to use the metric:

Investors use the 10-year Free Cash Flow Growth Rate to assess a company's ability to generate cash over a long period, which can indicate financial health and potential for future growth. A consistent growth rate suggests a stable and potentially profitable company.

Limitations:

The metric can be skewed by anomalies in cash flow due to one-time events or economic cycles. It also does not account for changes in capital structure or external factors affecting cash flow. Additionally, it assumes that past growth rates will continue, which may not always be the case.

Applies to:

This metric works best in stable industries with predictable cash flows, such as utilities, consumer staples, and established technology companies.

Doesn't apply to:

It may not apply well to industries with volatile cash flows, such as startups, biotech, or companies in cyclical industries, because their cash flow can be highly unpredictable and influenced by external factors.

Summary:

The 10-year Free Cash Flow Growth Rate is a useful metric for evaluating a company's long-term cash generation capability. While it provides insights into financial stability and growth potential, it should be used alongside other metrics and qualitative analysis to account for its limitations.