Free Cash Flow (FCF) is a crucial financial metric that represents the cash a company generates after accounting for the cash outflows required to maintain or expand its asset base. In simpler terms, it's the cash left over that a business can use for various purposes, such as paying down debt, distributing dividends to shareholders, or reinvesting in the business. It's a strong indicator of a company's financial health and operational efficiency, as it reflects the actual cash available to stakeholders.
How to Calculate Free Cash Flow
There are a couple of common methods to calculate FCF. The most widely used is the indirect method, which starts with operating income and makes adjustments.
The formula we use in this calculator is:
FCF = Operating Income (EBIT) * (1 – Tax Rate) + Depreciation & Amortization – Capital Expenditures – Changes in Working Capital
Operating Income (EBIT): Earnings Before Interest and Taxes. This shows the profitability from the company's core operations before financing costs and taxes.
Tax Rate: The effective tax rate applied to the operating income. We subtract taxes to get a figure closer to cash available.
Depreciation & Amortization: These are non-cash expenses. Since they were subtracted to arrive at EBIT, they are added back because they don't represent an actual cash outflow.
Capital Expenditures (CapEx): The cash spent by the company to acquire or upgrade its physical assets, such as property, plants, or equipment. This is a cash outflow necessary for maintaining operations.
Change in Working Capital: This represents the difference between current assets (like inventory and accounts receivable) and current liabilities (like accounts payable). An increase in working capital means more cash is tied up, hence it's a cash outflow. A decrease means cash is freed up.
Why is FCF Important?
Free Cash Flow is vital for several reasons:
Financial Flexibility: A high FCF indicates a company has the capacity to fund its operations, invest in growth, and satisfy financial obligations without needing external financing.
Valuation: FCF is a key component in many business valuation models, such as the Discounted Cash Flow (DCF) model.
Investor Returns: Companies with strong FCF are often better positioned to return value to shareholders through dividends and share buybacks.
Debt Management: FCF can be used to pay down debt, strengthening the company's balance sheet and reducing financial risk.
Example Calculation
Let's consider a company with the following figures for a given period:
Operating Income (EBIT): $800,000
Effective Tax Rate: 30%
Depreciation & Amortization: $120,000
Capital Expenditures (CapEx): $150,000
Change in Working Capital: -$30,000 (a decrease means cash is freed up)
This means the company generated $560,000 in cash that was available to its investors after all necessary operating and investment expenses.
function calculateFCF() {
var operatingIncome = parseFloat(document.getElementById("operatingIncome").value);
var taxRate = parseFloat(document.getElementById("taxRate").value);
var depreciationAmortization = parseFloat(document.getElementById("depreciationAmortization").value);
var capitalExpenditures = parseFloat(document.getElementById("capitalExpenditures").value);
var changesInWorkingCapital = parseFloat(document.getElementById("changesInWorkingCapital").value);
var resultValue = document.getElementById("result-value");
var resultDiv = document.getElementById("result");
// Input validation
if (isNaN(operatingIncome) || isNaN(taxRate) || isNaN(depreciationAmortization) || isNaN(capitalExpenditures) || isNaN(changesInWorkingCapital)) {
resultValue.innerHTML = "Please enter valid numbers for all fields.";
resultDiv.style.display = "block";
resultValue.style.color = "#dc3545"; // Red for error
return;
}
// Ensure tax rate is a decimal
var taxRateDecimal = taxRate / 100;
if (taxRateDecimal 1) {
resultValue.innerHTML = "Tax rate must be between 0% and 100%.";
resultDiv.style.display = "block";
resultValue.style.color = "#dc3545"; // Red for error
return;
}
var netOperatingProfitAfterTax = operatingIncome * (1 – taxRateDecimal);
var freeCashFlow = netOperatingProfitAfterTax + depreciationAmortization – capitalExpenditures – changesInWorkingCapital;
// Format the result to two decimal places and add comma separators
var formattedFCF = freeCashFlow.toLocaleString(undefined, {
minimumFractionDigits: 2,
maximumFractionDigits: 2
});
resultValue.innerHTML = "$" + formattedFCF;
resultDiv.style.display = "block";
resultValue.style.color = "#28a745"; // Green for success
}