What is Free Cash Flow?

Free Cash Flow (FCF) is an important financial metric that indicates how much cash a company generates after accounting for capital expenditures. It shows whether a company can produce enough cash to fund its growth, pay dividends, or reduce debt.

Formula for Free Cash Flow

The formula for calculating Free Cash Flow is:

Free Cash Flow = Operating Cash Flow - Capital Expenditure

Where:

• Operating Cash Flow: The cash generated by the company from its normal business operations.
• Capital Expenditure: The money spent by the company to maintain or expand its business operations, typically used for fixed assets like property, equipment, etc.

Example Calculation

Let’s consider a company with an operating cash flow of $100,000 and a capital expenditure of $20,000:

Free Cash Flow = $100,000 - $20,000 = $80,000

This means the company has $80,000 in free cash flow, which can be used for dividends, debt repayment, or reinvestment into the business.