What is Free Cash Flow (FCF)?

Free Cash Flow (FCF) refers to the amount of cash a company generates after accounting for capital expenditures, such as maintaining or expanding its assets.

FCF indicates how much cash is available to the company to grow, pay dividends, reduce debt, or reinvest in operations.

How is FCF Calculated?

The formula for FCF is:

Free Cash Flow = (Operating Cash Flow – Capital Expenditure)

Example:

If a company generates $500,000 from operations and spends $100,000 on capital expenditures, its FCF is:

FCF = 500000 – 100000 = 400000

Why is FCF Important for Investors?

• Indicates Financial Health: Positive FCF shows that a company is generating more cash than it needs to sustain its operations
• Investment Potential: Companies with high FCF have more resources for growth, debt repayment, or dividends
• Risk Reduction: A strong FCF can reduce financial risks, signaling stability during tough economic conditions

Using FCF with Other Ratios

Price-to-FCF Ratio: This compares a company’s stock price with its FCF.

A lower ratio may indicate an undervalued stock.

FCF Yield: This shows how much cash flow you’re getting per dollar invested.

Higher FCF yield often signals a better return.

Understanding FCF gives investors deeper insights into a company’s true profitability and long-term potential.

Hope this helps

God Bless!