#Free cash flow formula how to#

Calculating FCF Using Operating Cash Flow The three approaches help provide a way to calculate FCF regardless of the type of financial statements being analyzed. This is because financial statements are not always uniform, or standardized, across different industries and companies. There are three different approaches you can take when calculating free cash flow. In the same vein, it makes it important for industry professionals as they look to more efficiently manage financial operations and overhead. This makes it an important metric used by investors to understand how financially stable a business is and how effectively it is managing its capital structure to generate profit. As the name implies, when cash is “free” that means that it is available to fund future growth initiatives, cover debt financing, or pay dividends to shareholders. The name free cash flow derives from the fact that the calculation reveals how much cash is remaining, or “free”, after a business pays for all of its operating and capital expenses.

This means that FCF is a reflection of the true cash-creating potential of a business.

What Is Free Cash Flow?įree cash flow, often referred to as “FCF”, is a formula for calculating the excess cash a business generates through its normal course of operations.

#Free cash flow formula how to#

In this post we will cover what free cash flow is, the various ways to calculate it and how to interpret the results. This is because it is a practical form of analysis that can be helpful for many stakeholders. Like many financial metrics, free cash flow is used by both investors and industry professionals alike. Free cash flow is one of the most widely used tools analysts use to assess a business’s financial health.