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

Parameter

Location

Net income

Income statement

Non-cash expenses

Cash flow statement

Working Capital

Balance sheet

Cash Flow General Definition

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Cash Flow Facts

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