At times, many investors feel that because there’s almost too much information, advice and/or techniques for them to absorb, it is easier to hand everything over to a financial adviser and say: “Get on with it.”

There’s nothing wrong with that — nor is there any downside to investing in unit or investment trusts when investors can tap into the wisdom and expertise of fund managers whose job it is to enhance the value of their clients’ investments.

Many succeed spectacularly well: I take the view that holding a proportion of one’s investment portfolio in a diversified selection of funds is a very sound tactic.

However, I have long been an advocate of direct equity investment, which means it is important to know how to value a company; indeed, understanding how this is done also assists when investing in funds — not least to ensure they’re investing in solid enterprises.

In days of yore, companies were valued according to their tangible assets. This is fine when firms owned plant, equipment and raw materials, but less useful when value is determined according to intangible assets such as software, client databases or acquired brands. To value equities, therefore, it pays to have a valuation template suitable for service and industrial companies.

‘Free cash flow’ is an excellent guide. This is established by determining an organisation’s net income and adding other, non-cash, charges made against assets for items such as depreciation and amortisation.

Yet as we know, most assets depreciate in value over time, so investors should subtract an estimate of a company’s cost of maintaining tangible assets such as office, plant and equipment, and intangible assets including ‘brand identity’.

It is also worth remembering that companies often underestimate the cost of their employees’ pension and other benefits, while overestimating their benefit plans’ future returns. To properly analyse free cash flow, account must be taken of this and calculations adjusted accordingly.

Having arrived at a figure, the investor armed with a sharp pencil and calculator will next want to know whether it is representative of say, a five-year average and whether it is increasing or tailing off.

Investors scouring the market for companies boasting impressive free cash flow invariably unearth them in mature industries where requirements for capital to fund growth is limited and financing demands are modest, hence free cash is plentiful. The converse is true of high-growth companies.

However, it is one thing to have a plentiful supply of free cash and another to use it wisely. In other words, how good is a company’s management at deploying cash and making good decisions which enhance investor value?

More investigation is required to determine this and while it may sound like a chore, do not forget it is your hard-earned that is being invested. Nowadays, free cash flow is often returned to shareholders as dividends or share re-purchases, though it can be reinvested in the business.

Value investors — that is, most of us — usually look for organisations that buy their own stock, particularly when its undervalued – though a company’s management will be mindful (or should be) that intelligently invested earnings will generate higher future levels of free cash flow and better dividends.

It may all sound a tad long-winded, but when you get it right, the sense of satisfaction is palpable.