Free cash flow is the amount of leftover money in a company.

Cash flow is simply the difference between money coming in versus the money going out. It is arguably the most important financial metric for evaluating a person’s or company’s financial worth or intrinsic value.

Free cash flow (FCF) is the amount of cash (operating cash flow) which remains in a business after all expenditures (debts, expenses, employees, fixed assets, plant, rent etc.) have been paid. Free cash flow represents a company’s current cash value.

Cash Flow Versus Free Cash Flow

• Cash flow is the flow of cash coming in and going out of a business over a certain period of time. It is presented in a cash flow statement.
• Free cash flow represents the amount of disposable cash in a business (remaining after all expenditures). Sometimes, free cash flow is considered to be a company’s current cash value. Though, since it does not take into consideration a business’s growth potential, it is not normally considered a business valuation.

Free cash flow is the amount of cash that a company can put aside after it has paid all of its expenses at the end of an accounting period. It is an important measurement of the unconstrained cash flow of the company. It measures a company’s ability to generate internal growth and to return profits to shareholders.

What is free cash flow pic.twitter.com/NzingnbsC7

— Bharat Sharma (@bharatmsharma) February 16, 2022

Calculation of Free Cash Flow

FCF is simply a company’s operating cash flow (OCF) minus capital expenditures (CapEx). FCF represents how much money a company has after being free from its obligations.

• Free cash flow = Net cash flow from operating activities – capital expenditures – dividends

Positive free cash flow means that a company has done a good job of managing its cash. If free cash flow is negative then the company may have to look for other sources of funding such as issuing additional shares or debt financing.

Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments.

Free cash flow can be used to expand operations, bring on additional employees or invest in additional assets, and it can be put toward acquisitions or paid out in dividends to shareholders or used to buyback company’s shares.

References:

1. https://strategiccfo.com/free-cash-flow-analysis/
2. https://www.growthforce.com/blog/free-cash-flow-what-does-it-mean-for-business-growth