Free Cash Flow (FCF)

Free Cash Flow (FCF) is a financial metric that represents the cash generated by a company’s operations after deducting Capital Expenditures (CapEx). It indicates how much cash is available to be distributed to investors, such as Shareholders and debt holders, after the company has invested in maintaining or expanding its Asset base.

FCF is calculated using the formula:

FCF = Operating Cash Flow – Capital Expenditures

For example, if a company has an operating Cash Flow of $500,000 and Capital Expenditures of $200,000, the free Cash Flow would be:

FCF = $500,000 – $200,000 = $300,000

This means the company has $300,000 available for distribution to its investors.

In a case where a tech company invests heavily in new software development (CapEx of $1 million) but generates strong operating Cash Flow of $3 million, the FCF would be:

FCF = $3,000,000 – $1,000,000 = $2,000,000

Conversely, if a manufacturing company has high Capital Expenditures of $1.5 million but only generates $1 million in operating Cash Flow, its FCF would be:

FCF = $1,000,000 – $1,500,000 = -$500,000

A negative FCF indicates that the company is not generating enough cash to cover its investments, which could be a red flag for investors.