Free Cash Flow

What is Free Cash Flow?

Free Cash Flow (FCF) is the amount of cash a company generates after paying for its operating expenses and capital expenditures (CapEx). It represents the cash that’s available to the company for:

• Paying dividends
• Repaying debt
• Reinvesting in the business
• Acquiring other companies
• Holding as reserves

In simple terms, FCF tells you how much real cash a company has left after taking care of its basic needs.

Formula

There are a few ways to calculate Free Cash Flow, but the most common formula is:

FCF = Operating Cash Flow – Capital Expenditures

• Operating Cash Flow: Cash generated from core business operations (from the cash flow statement)
• Capital Expenditures (CapEx): Money spent on assets like equipment, machinery, or property

Example

Suppose a company has:

• Operating Cash Flow: ₹1,000 crore
• Capital Expenditure: ₹300 crore

Then,

Free Cash Flow = ₹1,000 crore – ₹300 crore = ₹700 crore

This means the company has ₹700 crore left after covering basic operating and capital expenses.

Why Free Cash Flow is Important?

• Indicator of Financial Health
  High or growing FCF often signals that a company is well-managed and profitable.

• Flexibility
  Companies with strong FCF can invest in new projects, return money to shareholders, or weather tough economic periods.

• Used in Valuation
  Investors and analysts use FCF in financial models like Discounted Cash Flow (DCF) to estimate a company’s value.

When Low FCF Isn’t Bad

Sometimes, a low or negative FCF may not be bad if:

• The company is investing heavily in long-term growth (e.g., new factories or R&D).
• It’s part of a planned business expansion.
• But persistent negative FCF could signal trouble.