Free Cash Flow Meaning

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.

Such as:

  • 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.

FCF formula

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 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



Net income

Income statement

Non-cash expenses

Cash flow statement

Working Capital

Balance sheet

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