What is Free Cash Flow?
It is indicative of a company’s profitability (FCF). It refers to the difference between the operating cash flow and capital expenses. So, capital expenditures refer to the cash used for the maintenance of assets.
- equipment used in the production process;
- property, production facility.
As such, a firm uses its capital assets to generate profit. The FCF formula which helps an investor calculate free cash flow is given below.
Free cash flow=Operating cash flow-capital expenditures
However, in particular instances, the cash flow statement indicating the operating cash flow is not readily available. In such a case, the income statement can be used to derive the FCF. One intends to look at four main parameters, namely the net earnings, non-cash expenses, and an increment in non-cash working capital. Further, the operating cash flow (CFO)/cash from operations is given by the following formula.
CFO=Net income+non-cash expenses-increase in non-cash net working capital
The subsets of the CFO formula can be found in the statements shown below.
Location of Subsets of the CFO Formula
Cash Flow General Definition
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