How To Calculate Free Cash Flow (FCF)
By Indeed Editorial Team
Updated July 28, 2021 | Published February 4, 2020
Updated July 28, 2021
Published February 4, 2020
What is free cash flow?
Free cash flow is the amount of cash an organization generates after operational expenses and funds used to manage assets are dispersed. FCF is used to pay investors and shareholders. Free cash flow is also called “free cash flow to firms,” abbreviated as “FCFF.” This number is helpful to shareholders interested in the amount of cash that can be withdrawn from an organization without disturbing operations.
Free cash flow is commonly confused with cash flow which appears on the cash flow statement. The key difference between the two is that cash flow is the net amount of cash or cash equivalents cycling in and out of the company. A positive or negative cash flow gives investors an understanding of how a company is performing financially. FCF is only the amount of cash left after cash spent to support daily operations and capital assets like land, property and machinery.
Related: Guide To Cash Flow
How to calculate free cash flow
There are several ways to calculate free cash flow. The most common method of calculating FCF is by using operating cash flow in the following formula:
Free cash flow = operating cash flow - capital expenditures
|Net Income||Current income statement|
|+||Non-cash expenditures||Current income statement|
|Increase in working capital||Current and previous period balance sheet|
|Capital expenditures (CAPEX)||Current and previous period balance sheet: Property, plant and equipment|
|_||Free cash flow|
|EBIT x (1-tax rate)||Current period income statement, statement of cash flows|
|+||Depreciation, Amortization and other non-cash expenses||Current period income statement, statement of cash flows|
|-||Change in working capital||Current and previous period balance sheet|
|-||Capital expenditures (CAPEX)||Current and previous period balance sheet: Property, plant and equipment|
|-||Free cash flows|
|Net profit||Current period income statement|
|+||Interest expense||Current period income statement|
|-||Tax shield on interest expense||Current income statement|
|-||Net changes in working capital||Current and previous period balance sheet|
|-||Net changes capital expenditures (CAPEX)||Current and previous period balance sheet: Property, plant and equipment|
|-||Free cash flows|
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