Definition:

The 5-year Free Cash Flow Growth Rate measures the annualized percentage growth in a company's free cash flow over a five-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 operational efficiency.

Formula:

((FCF in Year 5 / FCF in Year 0)^(1/5)) - 1

How to use the metric:

Investors and analysts use the 5-year Free Cash Flow Growth Rate to assess a company's ability to generate cash over time, which can indicate potential for reinvestment, debt reduction, or shareholder returns. A consistent growth rate suggests a company is effectively managing its operations and capital expenditures.

Limitations:

This metric may not account for one-time events or cyclical variations that can affect cash flow. It also assumes past growth rates will continue, which may not be the case. Additionally, companies with negative free cash flow in the base year or fluctuations in cash flow can distort the growth rate.

Applies to:

Industries with stable cash flow patterns, such as consumer goods, utilities, and mature technology companies, where consistent cash generation is a key performance indicator.

Doesn't apply to:

Industries with volatile or unpredictable cash flows, such as startups, biotechnology, or sectors with high capital expenditures like oil and gas, where cash flow can vary significantly due to external factors or investment cycles.

Summary:

The 5-year Free Cash Flow Growth Rate is a useful metric for evaluating a company's cash-generating ability over time, providing insights into financial health and operational efficiency. However, it should be used alongside other financial metrics and industry considerations to account for its limitations and ensure a comprehensive analysis.