Free Cash Flow (FCF) Calculator
What is Free Cash Flow (FCF)?
Free Cash Flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, FCF is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital from the balance sheet.
The FCF Formula
The most common and straightforward way to calculate Free Cash Flow is using the Cash Flow Statement:
FCF = Operating Cash Flow – Capital Expenditures
Where:
- Operating Cash Flow: The cash generated by the company's core business activities.
- Capital Expenditures (CapEx): The funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.
Suppose "TechFlow Inc." reports a Cash Flow from Operations of 850,000 for the fiscal year. During the same period, they spent 200,000 on new servers and office equipment (CapEx).
FCF = 850,000 – 200,000 = 650,000
This means the company has 650,000 available to pay dividends, buy back shares, or pay down debt.
Why FCF Matters to Investors
Investors often prefer FCF over Net Income because it is harder to manipulate with accounting tricks. A company can show a high Net Income but still be "cash poor" if all its profits are tied up in accounts receivable or spent on massive capital projects. Positive and growing FCF is generally a sign of a healthy, sustainable business model.
Interpreting the Results
Positive FCF: Indicates that the company is generating more cash than it needs to run its business and reinvest. This cash can be used for expansion, dividends, or debt reduction.
Negative FCF: Not always a bad sign, especially for growth-stage companies. It may indicate that the company is investing heavily in capital assets to fuel future growth. However, if FCF remains negative for a long period, the company may eventually need to seek external financing.