Quick Summary
FCF represents discretionary cash available for dividends, debt repayment, or reinvestment.
Free Cash Flow (FCF) is the cash a company generates after accounting for cash outflows to support operations and maintain capital assets. It is the cash available for distribution to all investors.
Free Cash Flow Formula
FCF = Operating Cash Flow - Capital Expenditures
Or expanded:
FCF = EBIT × (1 - Tax Rate) + Depreciation - CapEx - Change in Working Capital
Example
If a company has:
- Operating Cash Flow: ₹80 lakhs
- Capital Expenditures: ₹30 lakhs
FCF = ₹80 - ₹30 = ₹50 lakhs
Uses of Free Cash Flow
- Pay dividends to shareholders
- Repay debt
- Repurchase shares
- Fund acquisitions
- Reinvest in the business
- Build cash reserves
Types of FCF
- FCF to Firm (FCFF): Available to all investors (debt + equity)
- FCF to Equity (FCFE): Available to equity shareholders after debt payments
Key Points
- Cash available after all obligations
- Used in DCF valuation models
- Positive FCF indicates financial flexibility
- Can be used for dividends, buybacks, growth
- Key metric for investors and analysts