Under what condition should a firm ideally make payouts to investors?

The ideal condition for a firm to make payouts to investors, such as dividends or share buybacks, is when it is generating Free Cash Flow (FCF) and has a positive Net Present Value (NPV) on its investment projects.

Free Cash Flow is a key indicator of a company's financial health and represents the cash that is available to investors after all operating expenses and capital expenditures have been accounted for. When a company has strong FCF, it indicates that it has sufficient cash flows to not only reinvest in its core operations but also return surplus cash to shareholders without compromising future growth opportunities.

Additionally, a positive NPV implies that the company's potential investment opportunities are expected to generate returns greater than the cost of the capital used to finance them, suggesting effective capital allocation. If a firm has both healthy FCF and positive NPV projects, it signals that it can afford to reward its investors while sustaining and possibly growing its operations.

In contrast, relying on other conditions, such as total capital exceeding earnings, high market demand, or peak profit margins, does not necessarily reflect a sustainable or prudent payout strategy. These factors may indicate temporary financial performance but do not guarantee the long-term stability needed for consistent payouts.