Prior to requiring an irritating registration, the Motley Fool provided plenty of useful articles discussing tools for analyzing companies. One of these tools is free cash flow. While net income and earnings can be fudged easily, free cash flow is important because it is more difficult to manipulate. Free cash flow is actual cash money that a company can give back to investors (think dividends or share repurchases) or use to expand the business.

At its simplest, Free cash flow is cash from operating activities minus capital expenditures. The free cash flow calculation can be complicated endlessly by backing things out of operating expenditures that have nothing to do with operations, like the cost of stock option grants. I am lazy, but alert Prizzo Skeezy readers might Google “motley fool free cash flow” for more information. Cash from operating activities can be found on the consolidated statement of cash flows, as can capital expenditures. Sometimes cash from operating activities is labeled as net cash provided by operating activities, cash provided by operating activities, or something similar. Capital expenditures show up as total capital expenditures, property additions, capital investments, or similar.

Increasing free cash flow over time is desirable, while declining free cash flow is bad news. When comparing two companies in the same industry, the company with consistently higher free cash flow has an advantage. In the case of capital intensive industries, like railroads, a trend to watch for is declining capital expenditures. Because railroads require large capital investments in locomotives, freight cars, and rails to increase revenues, declining capital expenditures over a period of time is a red flag, even though free cash flow may be improving. While railroads are highlighted in this analysis and the following table free cash flow is a performance measure applicable to all companies.

All six railroads managed to increase free cash flow year over year and over their five year averages in 2006. As per usual, CSX (CSX) and Union Pacific (UNP) are getting smoked like it ain’t no thang by the other railroads. Canadian Pacific (CP) is also getting its ass handed to it. In contrast, Canadian National (CNI) is clearly kicking ass and taking names, while BNSF (BNI) and Norfolk Southern (NSC) are also doing quite well.

As free cash flow is dreadfully dull, it is time for more inspiration:

For more information on railroad specific performance measures, see previous posts in the series - Railroad Performance Measures: Average Train Speed and Railroad Performance Measures: Operating Ratio at the beginning.