Definition:

The 3-year Free Cash Flow Growth Rate measures the annualized percentage change in a company's free cash flow over a three-year period. Free cash flow is the cash generated by a company after accounting for capital expenditures, and it is an important indicator of financial health and the ability to generate shareholder value.

Formula:

((FCF in Year 3 / FCF in Year 0) ^ (1/3)) - 1

How to use the metric:

Investors and analysts use the 3-year Free Cash Flow Growth Rate to assess a company's ability to generate cash over time. A positive growth rate indicates that a company is improving its cash-generating capabilities, which can be a sign of operational efficiency, successful expansion, or effective cost management. This metric is often used in conjunction with other financial indicators to evaluate a company's overall financial performance and potential for future growth.

Limitations:

The 3-year Free Cash Flow Growth Rate can be influenced by one-time events, such as asset sales or large capital expenditures, which may not reflect the company's ongoing cash-generating ability. Additionally, this metric does not account for changes in working capital or the impact of financing activities. It may also be less meaningful for companies with volatile cash flows or those in industries with long investment cycles.

Applies to:

This metric is particularly useful in industries with stable cash flows and predictable capital expenditure patterns, such as consumer goods, utilities, and mature technology companies.

Doesn't apply to:

Industries with highly volatile cash flows or those requiring significant upfront investments, such as biotechnology, mining, and startups, may not find this metric as applicable. In these sectors, cash flows can be erratic due to research and development costs, exploration expenses, or initial scaling efforts, making the growth rate less indicative of long-term performance.

Summary:

The 3-year Free Cash Flow Growth Rate is a valuable tool for evaluating a company's ability to generate cash over a medium-term period. While it provides insights into operational efficiency and financial health, it should be used alongside other metrics to account for industry-specific factors and potential anomalies in cash flow data.