How is Free Cash Flow Calculated

Free Cash Flow (FCF) Calculator

The company's profit after all expenses, taxes, and interest.

Non-cash expenses added back to net income.

Positive for an increase (cash outflow), negative for a decrease (cash inflow).

Money spent on acquiring or maintaining fixed assets.

function calculateFCF() { var netIncome = parseFloat(document.getElementById('netIncome').value); var depreciationAmortization = parseFloat(document.getElementById('depreciationAmortization').value); var changeWorkingCapital = parseFloat(document.getElementById('changeWorkingCapital').value); var capitalExpenditures = parseFloat(document.getElementById('capitalExpenditures').value); if (isNaN(netIncome) || isNaN(depreciationAmortization) || isNaN(changeWorkingCapital) || isNaN(capitalExpenditures)) { document.getElementById('operatingCashFlow').innerText = 'Please enter valid numbers for all fields.'; document.getElementById('freeCashFlow').innerText = "; return; } // Calculate Operating Cash Flow (OCF) // OCF = Net Income + Depreciation & Amortization – Increase in Non-Cash Working Capital var operatingCashFlow = netIncome + depreciationAmortization – changeWorkingCapital; // Calculate Free Cash Flow (FCF) // FCF = Operating Cash Flow – Capital Expenditures var freeCashFlow = operatingCashFlow – capitalExpenditures; document.getElementById('operatingCashFlow').innerText = '$' + operatingCashFlow.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); document.getElementById('freeCashFlow').innerText = '$' + freeCashFlow.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); } // Calculate on page load with default values window.onload = calculateFCF;

Understanding Free Cash Flow (FCF)

Free Cash Flow (FCF) is a crucial financial metric that represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. In simpler terms, it's the cash left over that a company can use to expand, pay dividends, reduce debt, or buy back shares, without impairing its ongoing operations.

Why is FCF Important?

• Indicator of Financial Health: A consistently positive and growing FCF indicates a financially healthy and stable company.
• Valuation Tool: FCF is often used in discounted cash flow (DCF) models to determine a company's intrinsic value, as it represents the actual cash available to all capital providers.
• Flexibility: Companies with strong FCF have greater flexibility to pursue strategic initiatives, weather economic downturns, and reward shareholders.
• Debt Repayment & Dividends: It shows a company's ability to pay down debt, issue dividends, or repurchase stock without needing to raise additional capital.

How is Free Cash Flow Calculated?

The most common way to calculate Free Cash Flow starts with Operating Cash Flow and then subtracts Capital Expenditures. Here's a breakdown of the components used in this calculator:

• Net Income: This is the starting point, found on the income statement. It represents the company's profit after all operating expenses, interest, and taxes have been deducted. However, net income includes non-cash expenses, which need to be adjusted for.
• Depreciation & Amortization: These are non-cash expenses that reduce net income but do not involve an actual outflow of cash. Since we're looking for cash flow, these amounts are added back to net income.
• Change in Non-Cash Working Capital: Working capital is the difference between current assets and current liabilities. Changes in non-cash working capital (e.g., accounts receivable, inventory, accounts payable) affect a company's cash position. An increase in non-cash working capital (e.g., more inventory or receivables) means cash is tied up, so it's subtracted. A decrease means cash is freed up, so it's added (by entering a negative value in the calculator).
• Operating Cash Flow (OCF): This intermediate step represents the cash generated from a company's normal business operations before accounting for capital investments. It's calculated as:
  Net Income + Depreciation & Amortization - Increase in Non-Cash Working Capital
• Capital Expenditures (CapEx): These are funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. CapEx represents a cash outflow necessary to maintain or grow the business, and thus it is subtracted from Operating Cash Flow to arrive at FCF.

Formula:

Free Cash Flow (FCF) = Operating Cash Flow (OCF) - Capital Expenditures (CapEx)

Where:

Operating Cash Flow (OCF) = Net Income + Depreciation & Amortization - Change in Non-Cash Working Capital

Example Calculation:

Let's use the default values in the calculator:

• Net Income: $1,000,000
• Depreciation & Amortization: $200,000
• Increase in Non-Cash Working Capital: $50,000
• Capital Expenditures (CapEx): $300,000

First, calculate Operating Cash Flow (OCF):
OCF = $1,000,000 (Net Income) + $200,000 (D&A) - $50,000 (Change in WC) = $1,150,000

Next, calculate Free Cash Flow (FCF):
FCF = $1,150,000 (OCF) - $300,000 (CapEx) = $850,000

This means the company has $850,000 in cash available after covering its operational costs and necessary investments in assets.