Free Cash Flow Formula (FCF)

What is Free Cash Flow Formula (FCF)?

Free Cash flow is cash in hand of a company, after paying all the expenses. Cash is an important element for business. It is required for the functioning of business; some investors give more to cash flow statements than other financial statements. Free cash flow is a measure of Cash Company is generating after paying all expenses and loans. It helps to find an actual financial condition of free cash flowFree Cash FlowThe cash flow to the firm or equity after paying off all debts and commitments is referred to as free cash flow (FCF). It measures how much cash a firm makes after deducting its needed working capital and capital expenditures (CAPEX).read more reflects in cash statement. The free cash flow (FCF) formula is operating cash flowOperating Cash FlowCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more minus capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more.

Free Cash Flow Formula = Operating Cash Flow – Capital Expenditure

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For eg:
Source: Free Cash Flow Formula (FCF) (wallstreetmojo.com)

The free cash flow equation helps to find the true profitability of a company, and it also helps to calculate dividend payout available to distribute it to a shareholder. Through this, investors get clarity about the financial condition of a company, which provides in detail about the liquidity of a company.

There is another formula to calculate free cash flow, which is net income plus non-cash expenseNon-cash ExpenseNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation.read more minus the increase in working capital minus capital expenditure.

The formula for the calculation of free cash flow (FCF) is as follows:-

fcf formula2

Calculate FCF using Free Cash Flow Formula – Step by Step

Now, let’s see the steps to calculate FCF and formula components.

  1. To calculate Cash from Operations and Net income.


    Cash from the operation is net income plus non-cash expense minus increase in non-cash working capital.

    Cash from operations = Net income + Non-cash expense – Increase in non-cash working capital.

  2. To calculate Non-Cash Expense.


    It is a sum of depreciation, amortization, share-based compensationShare-based CompensationStock-based compensation also called share-based compensation refers to the rewards given by the company to its employees by way of giving them the equity ownership rights in the company with the motive of aligning the interest of the management, shareholders and the employees of the company.read moreStock-based compensation also called share-based compensation refers to the rewards given by the company to its employees by way of giving them the equity ownership rights in the company with the motive of aligning the interest of the management, shareholders and the employees of the company.read moreStock-based compensation also called share-based compensation refers to the rewards given by the company to its employees by way of giving them the equity ownership rights in the company with the motive of aligning the interest of the management, shareholders and the employees of the company.read more, impairment charges, and gains or losses on investments.

    Non-Cash Expense = Depreciation + Amortization + Stock-based compensation + Impairment Charges + Gains or losses on Investments

  3. Calculate changes in non-cash net working capitalNet Working CapitalThe Net Working Capital (NWC) is the difference between the total current assets and total current liabilities. A positive net working capital indicates that a company has a large number of assets, while a negative one indicates that the company has a large number of liabilities.read moreThe Net Working Capital (NWC) is the difference between the total current assets and total current liabilities. A positive net working capital indicates that a company has a large number of assets, while a negative one indicates that the company has a large number of liabilities.read moreThe Net Working Capital (NWC) is the difference between the total current assets and total current liabilities. A positive net working capital indicates that a company has a large number of assets, while a negative one indicates that the company has a large number of liabilities.read more or increase in working capital.


    Changes in working capital can be calculated by comparing current year inventory, account receivable, or account payable with previous year values. The formula can be written as:-

    Change in Working Capital = (AR2018 – AR2017) + (Inventory2018 – Inventory2017) – (AP2018 – AP2017)

    Where,
    AR = Account Receivable
    AP = Account Payable

  4. Calculate Capital Expenditure.


    Capital expenditure can be calculated by using the PP&E approach, which is Property, Plant, and EquipmentProperty, Plant, And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read moreProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read moreProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read more. The formula for the same can be calculated by below:-

    CapEx = PP&E2018 – PP&E2017 + Depreciation & Amortization

    Where,
    PP&E = Property, Plant, and Equipment

  5. Calculate the FCF Formula.


    Now as we know, the formula for FCF is:-

    Free Cash Flow (FCF) Formula = Net Income + Non-cash expenses – Increase in working capital – Capital Expenditure

    Putting the value calculated in step 1 to step 4 in the above.

    FCF = Net Income + Depreciation + Amortization + Stock based compensation + Impairment Charges + Gains or losses on Investments – {(AR2018 – AR2017) + (Inventory2018 – Inventory2017) – (AP2018 – AP2017)} – {PP&E2018 – PP&E2017 + Depreciation & Amortization}

    In Simple,

    Free Cash Flow Formula = Cash from Operations – CapEx.

Examples of FCF Formula (with Excel Template)

Let’s see some simple to advanced examples to understand the calculation of free cash flow formula better.

You can download this Free Cash Flow Formula Excel Template here – Free Cash Flow Formula Excel Template

Example #1

A company named Greenfield Pvt. Ltd, which deals with organic vegetables, have a capital expenditure of $200 and an operating cash flow of $1,100. Now calculate the Free cash flow for the company.

In the below-given template is the data for the calculation of free cash flow equation.

Free cash Flow formula example1.1

So, the calculation of free cash flow will be-

free cash flow formula example1.2

i.e. Free Cash Flow Formula = $1,100 – $200

So, Free Cash Flow will be –

free cash flow formula example1.3

FCF for a company is $900.00 after reducing capital expenditure.

Example #2

Let’s see an example to calculate free cash flow with another formula.

Suppose a company with a net income of $2,000, capital expenditure of $600, non-cash expense $300, and an increase in working capital $250.

In the below-given template is the data for the calculation of free cash flow equation.

free cash flow formula example2.1

So, the Calculation of Free Cash Flow will be –

free cash flow formula example2.2

i.e. FCF = 2000 + 300 – 250 – 600

Now, Free Cash Flow will be –

fcf formula example2.3

Free Cash Flow, i.e., FCF of a company is $11,450.00

Other Free Cash Flow Formulas

There are basically two types of Free Cash Flow; one is FCFF, and another is FCFE.

#1 – Free Cash to the Firm (FCFF) Formula

FCFF is also referred to as Unlevered. It is the ability of a company to generate cash for its capital expenditure.  FCFF is cash flow from operating activities minus capital expenditure.

fcf formula3
Example of FCFF

Suppose a company with capital expenditure of $1000 and cash flow from operating activities is $2500. Now, let’s calculate FCFF.

In the below-given template is the data for the calculation of Free Cash to Firm.

fcf formula example3.1

So, the calculation of FCFF will be –

fcf formula example3.2

i.e. FCFF = 2500 – 1000

Therefore FCFF will be –

fcf formula example3.3

So, FCFF for company is $1,500.00

#2 – Free Cash Flow to Equity (FCFE) Formula

FCFEFCFEFCFE (Free Cash Flow to Equity) determines the remaining cash with the company's investors or equity shareholders after extending funds for debt repayment, interest payment and reinvestment. It is an indicator of the company's equity capital managementread more is basically cash available for a shareholder of the company to distribute a dividend. FCFE helps to calculate dividend payout available to distribute it to a shareholder.

FCFE is a sum of free cash to the firm plus net borrowing minus interest multiply by one minus tax.

fcf formula4
Example of FCFE

Let’s take an example where a company with a capital expenditure of $1000, net borrowing of $500 with an interest of $200 and a tax of 25%, and cash flow from operating activities is $2500. Now, let’s calculate FCFF.

In below-given template is the data for the calculation of Free Cash Flow to Equity (FCFE)

fcf formula example4.1

FCFF –

fcf formula example4.2

i.e. FCFF Formula= 2500 – 1000

FCFF = $1,500.00

So, the calculation of FCFE will be –

fcf formula example4.3

i.e. FCFE Formula = 1500 + 500 – 200 * (1-.25)

Therefore, FCFE will be –

fcf formula example4.4

So, FCFE for a company is $1,850.00

Free Cash Flow Calculator

You can use the following Free cash flow calculator –

Operating Cash Flow
Capital Expenditure
Free Cash Flow Formula
 

Free Cash Flow Formula = Operating Cash Flow Capital Expenditure
0 0 = 0

Relevance and Use

There are multiple uses of the free cash flow equation they are as follows:-

  • To calculate the profitability of a company.
  • To get a financial position of a company.
  • Free Cash Flow Formula helps a company to make a decision of new product, debt, business opportunity.
  • Free Cash Flow Formula helps to know cash available, which have to be distributed among shareholders of a company.

If the FCF of a company is high, then it means a company has sufficient funds for a new product launch, business expansion, and growth of the company, but sometimes if a company has a low FCF, it may possible company will have huge investment and company will grow in the long run. FCF helps an investor to calculate their profitable returns on investment in a particular company.

Recommended Articles

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