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 flow reflects in cash statement. The free cash flow (FCF) formula is operating cash flow minus capital expenditure.

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 expense minus the increase in working capital minus capital expenditure.

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

Calculate FCF using Free Cash Flow Formula – Step by Step

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

Step 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.

Step 2: To calculate Non-Cash Expense.

It is a sum of depreciation, amortization, share-based compensation, impairment charges, and gains or losses on investments.

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

Step 3: Calculate changes in non-cash net working capital 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

Step 4: Calculate Capital Expenditure.

Capital expenditure can be calculated by using the PP&E approach, which is Property, Plant, and Equipment. The formula for the same can be calculated by below:-

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

Where,

PP&E = Property, Plant, and Equipment

Step 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.

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.

So, the calculation of free cash flow will be-

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

So, Free Cash Flow will be –

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.

So, the Calculation of Free Cash Flow will be –

i.e. FCF = 2000 + 300 – 250 – 600

Now, Free Cash Flow will be –

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.

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.

So, the calculation of FCFF will be –

i.e. FCFF = 2500 – 1000

Therefore FCFF will be –

So, FCFF for company is $1,500.00

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

FCFE 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.

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)

FCFF –

i.e. FCFF Formula= 2500 – 1000

FCFF = $1,500.00

So, the calculation of FCFE will be –

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

Therefore, FCFE will be –

So, FCFE for a company is $1,850.00

Free Cash Flow Calculator

You can use the following Free cash flow calculator –

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

This article has been a guide to Free Cash Flow (FCF) Formula. Here we discuss how to calculate Free Cash Flow (FCF) using practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles –

• Free Cash Flow from EBITDA
• 4 Examples of Cash Flow Statement
• Cash Flow vs. Free Cash Flow | Compare
• Calculate FCFY