How to Calculate Fcf Growth Rate

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Free Cash Flow (FCF) Growth Rate Calculator

What is Free Cash Flow (FCF) Growth?

Free Cash Flow (FCF) Growth Rate measures the percentage increase or decrease in a company's cash flow after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings per share, FCF is harder to manipulate and represents the actual cash a company has available to repay creditors or pay dividends and interest to investors.

How to Calculate FCF Growth Rate

The calculation is straightforward. It compares the cash generated in the current period against the cash generated in the previous period using the standard percentage change formula:

Formula: ((Current FCF - Previous FCF) / |Previous FCF|) * 100

Realistic Example:
Suppose Company A had a Free Cash Flow of $1,200,000 in 2022. In 2023, due to increased operational efficiency, their FCF rose to $1,500,000.

1. Subtract 2022 FCF from 2023 FCF: $1,500,000 – $1,200,000 = $300,000.
2. Divide by 2022 FCF: $300,000 / $1,200,000 = 0.25.
3. Multiply by 100 to get the percentage: 25% Growth Rate.

Why FCF Growth Matters to Investors

  • Sustainability: Consistently positive FCF growth suggests a company can sustain its operations and expand without relying solely on external financing.
  • Valuation: Many valuation models, such as the Discounted Cash Flow (DCF), rely heavily on projected FCF growth rates.
  • Dividend Safety: For income investors, growing FCF is the primary indicator that a company can afford to increase its dividend payouts.

Common Pitfalls

A single year of massive growth might be due to the sale of an asset (which lowers CapEx), rather than improved operations. Always look for a multi-year trend rather than a single data point. Furthermore, if a company has negative FCF, the growth rate can be mathematically misleading; in such cases, it's better to analyze the absolute dollar improvement.

function calculateFCF() { var prev = parseFloat(document.getElementById('prevFCF').value); var curr = parseFloat(document.getElementById('currFCF').value); var resultDiv = document.getElementById('fcfResult'); var valueDiv = document.getElementById('growthValue'); var interpretationDiv = document.getElementById('growthInterpretation'); if (isNaN(prev) || isNaN(curr)) { alert("Please enter valid numerical values for both periods."); return; } if (prev === 0) { valueDiv.innerHTML = "Undefined"; interpretationDiv.innerHTML = "Growth cannot be calculated when the previous period FCF is zero."; resultDiv.style.display = "block"; return; } // Standard growth formula: ((New – Old) / |Old|) * 100 var growth = ((curr – prev) / Math.abs(prev)) * 100; var formattedGrowth = growth.toFixed(2); valueDiv.innerHTML = formattedGrowth + "%"; var message = ""; if (growth > 0) { message = "Positive Growth: The company is generating more surplus cash than the previous period, indicating improved financial health or efficiency."; } else if (growth < 0) { message = "Negative Growth: The company's free cash flow has decreased. This could be due to rising operational costs, increased capital expenditure, or falling revenues."; } else { message = "Zero Growth: The company's cash flow remains stable and unchanged from the previous period."; } interpretationDiv.innerHTML = message; resultDiv.style.display = "block"; }

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