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Free Cash Flow

Free Cash Flow.webp

Key Highlights

  • Free Cash Flow (FCF) is the amount of cash a company generates after paying for its operating expenses and capital expenditures (CapEx).

  • FCF = Operating Cash Flow – Capital Expenditures.

What is Free Cash Flow?

Free Cash Flow (FCF) is the amount of cash a company generates after paying for its operating expenses and capital expenditures (CapEx). It represents the cash that’s available to the company for:

  • Paying dividends
  • Repaying debt
  • Reinvesting in the business
  • Acquiring other companies
  • Holding as reserves

In simple terms, FCF tells you how much real cash a company has left after taking care of its basic needs.

Formula

There are a few ways to calculate Free Cash Flow, but the most common formula is:

FCF = Operating Cash Flow – Capital Expenditures

  • Operating Cash Flow: Cash generated from core business operations (from the cash flow statement)
  • Capital Expenditures (CapEx): Money spent on assets like equipment, machinery, or property

Example

Suppose a company has:

  • Operating Cash Flow: ₹1,000 crore
  • Capital Expenditure: ₹300 crore

Then,

Free Cash Flow = ₹1,000 crore – ₹300 crore = ₹700 crore

This means the company has ₹700 crore left after covering basic operating and capital expenses.

Why Free Cash Flow is Important?

  • Indicator of Financial Health
    High or growing FCF often signals that a company is well-managed and profitable.

  • Flexibility
    Companies with strong FCF can invest in new projects, return money to shareholders, or weather tough economic periods.

  • Used in Valuation
    Investors and analysts use FCF in financial models like Discounted Cash Flow (DCF) to estimate a company’s value.

When Low FCF Isn’t Bad

Sometimes, a low or negative FCF may not be bad if:

  • The company is investing heavily in long-term growth (e.g., new factories or R&D).
  • It’s part of a planned business expansion.
  • But persistent negative FCF could signal trouble.