Free cash flow (FCF)
What is free cash flow (FCF)?
It represents the cash that a company produces through its business operations minus any capital expenditure on maintaining or improving its assets, such as plant and machinery. The cash remaining is thus 'free' to be deployed as the company and its owners decide.
Where have you heard about free cash flow (FCF)?
As an investor, you may have seen figures for free cash flow (FCF) given in the reports of companies in which you are invested. Financial media sometimes refer to FCF when reporting on the health or otherwise of specific firms.
What you need to know about free cash flow (FCF).
The purposes to which FCF can be put include:
- Research and development
- Corporate acquisitions
- The payment of dividends (this last being of special interest to shareholders)
The formula for calculating FCF is:
EBIT (1-tax rate) + (depreciation) + (amortization) - (change in net working capital) - (capital expenditure)
FCF is considered by some to be a true reflection of a firm's ability to generate profits as earnings can be adjusted by various accounting practices. For example, in start-ups FCF may turn negative for a while as it makes substantial investments. Assuming these pay off, FCF will subsequently turn positive.
Find out more about free cash flow (FCF).
FCF figures are a key element in financial reporting. Learn more about financial reports here.