Free Cash Flow
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Free Cash Flow
Free Cash Flow Definition(FCF)
Free cash flow (FCF) is the cash a company generates from its operations after accounting for capital expenditures required to maintain or grow its business. In other words, free cash flow is the excess cash that remains after a company spends the money on all things it requires to sustain its operations.
The significance of FCF lies in the fact that it provides us with actual money that can be used in any manner, such as reducing debt, making payments to the stockholders, making investments back into the company, or keeping it as extra cash, as opposed to net income or revenue, which may not always provide actual cash.
Free Cash Flow Formula
| Free Cash Flow = Operating Cash Flow − Capital Expenditures |
- Operating Cash Flow (OCF): Cash generated from core business operations, found in the “cash flow from operating activities” section of the cash flow statement
- Capital Expenditures (CapEx): Cash spent on long-term assets like equipment, property, or technology, found under “investing activities”
Here is a practical example
A company reports:
- Operating Cash Flow: $800,000
- Capital Expenditures: $200,000
Free cash flow= $800,000 − $200,000 = $600,000
What Is the Meaning of Positive/Negative Free Cash Flow?
- A positive free cash flow: It is an indication that the company has more cash available than it requires for running and expanding its business, and is a good financial position where the cash can be used for paying off debt, dividends, share repurchases, or reinvesting.
- A negative free cash flow: It doesn’t mean anything bad, since startups or companies in their early stages are usually designed to have negative free cash flow. In other words, negative free cash flow in such cases is similar to positive burn rate.
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