Financial modelling terms explained

Free Cash Flow

Free cash flow (FCF) is a measure of corporate financial health, specifically the amount of cash available for distribution to shareholders, debt repayment, or other corporate purposes. It is the cash flow of a company minus capital expenditures.Free cash flow = operating cash flow – capital expenditures

What Is Free Cash Flow?

Free cash flow (FCF) is a measure of a company's financial health and its ability to generate cash. FCF is calculated as operating cash flow minus capital expenditures. This metric is important for investors because it indicates whether a company has the cash flow to cover its expenses, including debt payments.

FCF can be used to evaluate a company's ability to repay debt, make investments, and return money to shareholders. It is also a key metric for assessing a company's stock valuation. A high FCF ratio indicates that a company is generating a lot of cash, which could lead to a higher stock price.

There are several ways to improve a company's FCF. One is to reduce capital expenditures, which can be done by slowing down or stopping new investment projects. Another way to improve FCF is to increase operating cash flow, which can be done by increasing sales or cutting costs.

How Do You Calculate Free Cash Flow?

In order to calculate free cash flow, one must first determine a company's net income. This is done by subtracting a company's total expenses from its total revenue. Once a company's net income is determined, one can then subtract its capital expenditures from that number in order to calculate its free cash flow.

Why Is Free Cash Flow Important?

Free cash flow is important because it is a measure of a company's ability to generate cash from its operations. This is important because it can be used to fund the company's operations, pay dividends, or make acquisitions. In addition, free cash flow can be used to assess the company's financial health and its ability to repay its debt.

What Is the Difference Between Free Cash Flow and Cash Flow?

The difference between free cash flow and cash flow is that free cash flow includes all cash generated by a company, while cash flow only includes the cash used by a company for its operations. Free cash flow is a more important measure of a company's financial health because it measures the amount of cash available to pay dividends, buy back stock, or reinvest in the company. Cash flow is important because it measures how much cash a company has to pay its bills, but it does not tell you how much cash the company has leftover to invest in the future.

What Is the Difference Between Free Cash Flow and Profit?

Free cash flow (FCF) is a measure of a company's financial health and its ability to generate cash. It is calculated as the difference between a company's cash flow from operations and its capital expenditures. Profit, on the other hand, is a measure of a company's financial performance and is calculated as revenue minus expenses.

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