How to Calculate Growth Rate of Free Cash Flow

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Free Cash Flow (FCF) Growth Rate Calculator

Determine the Compound Annual Growth Rate (CAGR) of your business's cash flow over time.

Analysis Results:

function calculateFCFGrowth() { var initialValue = parseFloat(document.getElementById('initialFCF').value); var finalValue = parseFloat(document.getElementById('finalFCF').value); var years = parseFloat(document.getElementById('fcfYears').value); var resultDiv = document.getElementById('fcfResult'); if (isNaN(initialValue) || isNaN(finalValue) || isNaN(years) || years <= 0) { alert("Please enter valid positive numbers for all fields."); return; } if (initialValue 15) { interpretationText = "This represents high growth, typical of scaling companies or efficient operations."; } else if (cagr > 5) { interpretationText = "This shows healthy, stable growth above average inflation rates."; } else if (cagr > 0) { interpretationText = "Positive but modest growth. Consider reviewing cost management."; } else { interpretationText = "Negative growth indicates a decline in free cash flow efficiency over this period."; } document.getElementById('interpretation').innerText = interpretationText; resultDiv.style.display = 'block'; }

Understanding Free Cash Flow Growth Rates

Free Cash Flow (FCF) is widely considered the gold standard for assessing a company's financial health. Unlike net income, which can be manipulated by accounting practices, FCF represents the actual cash a business generates after accounting for cash outflows to support operations and maintain its capital assets.

Calculating the growth rate of free cash flow is essential for investors performing Discounted Cash Flow (DCF) valuations and for business owners measuring the trajectory of their profitability.

The FCF Growth Formulas

There are two primary ways to look at growth: Simple Growth and Compound Annual Growth Rate (CAGR).

1. Simple Period-over-Period Growth

Use this when you want to compare one year to the next.

Formula: ((Current Year FCF – Previous Year FCF) / Previous Year FCF) × 100

2. Compound Annual Growth Rate (CAGR)

Use this when evaluating growth over several years. It "smooths out" volatility and tells you the average rate at which the cash flow grew each year, assuming the growth compounded.

Formula: [(Ending FCF / Beginning FCF)(1 / n) – 1] × 100
(where n = number of years)

Step-by-Step Calculation Example

Imagine a software company with the following financial data:

  • Year 1 FCF: $100,000
  • Year 4 FCF: $175,000
  • Time Period: 3 Years (The transition from end of year 1 to end of year 4)

Applying the CAGR formula:

  1. Divide the ending value by the beginning value: $175,000 / $100,000 = 1.75
  2. Raise that to the power of 1/n (1/3): 1.750.333 ≈ 1.205
  3. Subtract 1: 1.205 – 1 = 0.205
  4. Multiply by 100: 20.5%

In this example, the company's Free Cash Flow grew at an average annual rate of 20.5% over three years.

Why This Metric Matters

For an investor, FCF growth is often more important than revenue growth. A company can grow its revenue while burning cash, but it cannot sustain negative free cash flow indefinitely. Growing FCF signals that a company can:

  • Pay down debt without taking on new loans.
  • Pay dividends to shareholders.
  • Reinvest in new products or acquisitions.
  • Weather economic downturns with a cash cushion.

Common Pitfalls

When calculating FCF growth, watch out for "one-off" events. For example, if a company sells a large piece of real estate, its Capital Expenditures (CapEx) might look artificially low, making FCF look artificially high for that year. Always look at the trend over 3 to 5 years rather than focusing on a single year's growth rate to get an accurate picture of the business trajectory.

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