Enter the net income, capital expenditures, depreciation, and changes in working capital into the calculator. The calculator will evaluate and display the free cash flow.
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Free Cash Flow Formula
The following equation can be used to calculate the free cash flow of a business.
FCF = (NI + D – WC) – CE
- Where FCF is free cash flow
- NI is net income
- D is deprecation
- WC is a change in working capital
- CE is capital expenditure
Free Cash Flow Definition
Free cash flow is a financial metric that indicates the amount of cash a company generates after deducting its operating expenses and capital expenditures. It represents the cash available to the company for various purposes, such as expansion, debt payment, dividends, or investment in new projects.
Free cash flow is vital for several reasons. First, it serves as an indicator of a company’s financial health and ability to generate surplus cash. A positive free cash flow indicates that a company generates more cash than it needs for its day-to-day operations and investments, which is generally considered positive.
Second, free cash flow enables a company to pursue growth opportunities. With surplus cash, a company can invest in research and development, acquire new businesses, or expand its operations. This flexibility allows companies to adapt to changing market conditions, invest in innovation, and stay competitive.
Third, free cash flow is crucial for debt management. Companies with high levels of free cash flow can use the surplus to repay debts, reducing their interest expenses and improving their creditworthiness. This strengthens their financial position and provides them with more favorable terms for borrowing in the future.
Free Cash Flow Example
How to calculate free cash flow?
- First, determine the net operating income
This will be your total revenue generated by your business.
- Next, determine the depreciation
Determine the total value of deprecation of the assets in your business.
- Next, determine the change in working capital
Calculate your change in working capital over the time period being analyzed.
- Next, determine the capital expenditures
This should be equal to your total operating expenses.
- Finally, calculate the free cash flow
Calculate the free cash flow of your business or asset using the information from steps 1-4 and the formula above.
FAQ
Free cash flow is the total cash, or money, that you have available to spend after all expenses and depreciation is accounted for.