Free cash flow
Free cash flow (also known by its acronym, FCF; hereinafter, FCF) is the primary indicator of cash actually available for distribution to the:
- Owners. This type of distribution is known as free cash flow to equity (FCFE); and/or
- Company itself. This type of distribution is known as free cash flow to firm (FCFF),
after the company has made all investments in fixed assets and other projects, as well as set aside the working capital necessary to sustain ongoing operations.
Contents
Definitions
According to Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston (15th edition),
- Free cash flow (FCF). The amount of cash that could be withdrawn without harming a firm's ability to operate and to produce future cash flows.
According to Managerial Accounting by Braun, Tietz (5th edition),
- Free cash flow. The amount of excess cash a business generates after taking into consideration the capital expenditures necessary to maintain its business. It is calculated as cash flows from operating activities minus capital expenditures.
Purpose
FCF represents the cash a company generates after cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital.
Interest payments are excluded from the generally accepted definition of free cash flow. Investment bankers and analysts who need to evaluate a company’s expected performance with different capital structures will use variations of free cash flow like free cash flow for the firm and free cash flow to equity, which are adjusted for interest payments and borrowings.
Similar to sales and earnings, free cash flow is often evaluated on a per share basis to evaluate the effect of dilution.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
