Free Cash Flow

What is Free Cash Flow?

Free Cash Flow (FCF) is the actual cash a company has left after paying for everything it needs to maintain and grow its business.

It shows:

• How much cash is actually available
• Ability to fund growth
• Financial flexibility
• True operational efficiency

👆 By the way, an interesting fact: Warren Buffett considers Free Cash Flow one of the most important metrics when evaluating companies – he calls it the “owner’s earnings”!

How to Calculate Free Cash Flow

The Basic Formula for Free Cash Flow

Free Cash Flow = Operating Cash Flow – Capital Expenditures

Where:

Operating Cash Flow = Cash from day-to-day business

Capital Expenditures = Money spent on long-term assets

The Detailed Formula

Free Cash Flow = Net Income

+ Depreciation & Amortization

– Changes in Working Capital

– Capital Expenditures

Example Time! ✨

Let’s say a company has:

• Net Income: $1,000,000
• Depreciation: $200,000
• Working Capital Increase: $150,000
• Capital Expenditures: $300,000

Calculation:

• FCF = $1,000,000 + $200,000 – $150,000 – $300,000 = $750,000

Why Free Cash Flow Matters

Investment Decisions 🎯

• Shows ability to fund growth
• Indicates need for external funding
• Guides acquisition decisions

Business Health 🏥

• Reveals true profitability
• Shows operational efficiency
• Indicates financial flexibility

Valuation 💎

• Helps determine company value
• Guides investment decisions
• Shows business sustainability

Remember: positive Free Cash Flow is great, but context matters:

• Growing companies might have negative FCF due to investments
• Mature companies should have stable, positive FCF
• Seasonal businesses might see fluctuations