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Free Cash Flow

Updated on March 15, 2023

Free cash flow (FCF) is defined as the cash left with a company after it pays for its businesses’ operating expenses and capital expenditures. These include payments towards rent and taxes, payroll and other such expenses. FCF is an important parameter for investors and for management alike for making investment and business decisions respectively. Free cash flow is an indicator which demonstrates the company’s efficiency and its management’s capability. Investors use Free Cash Flow to measure whether a company might have enough cash for dividends, growth, expansion or share repurchase programs.
Also, a better FCF will help the company in paying off its debts and help in business growth, which in turn will make it a more attractive investment.

Calculation of Free Cash Flow

Calculation of Free Cash Flow

Using Operating Cash flow:
Free Cash Flow (FCF) = Operating Cash Flow – Capital Expenditure

Using Sales Revenue method:
Free Cash Flow = Sales revenue – (Operating Costs + Taxes)