Free Cash Flow - FCF

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DEFINITION of 'Free Cash Flow - FCF'

A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital ExpenditureIt can also be calculated by taking operating cash flow and subtracting capital expenditures.

BREAKING DOWN 'Free Cash Flow - FCF'

Some believe that Wall Street focuses myopically on earnings while ignoring the "real" cash that a firm generates. Earnings can often be clouded by accounting gimmicks, but it's tougher to fake cash flow. For this reason, some investors believe that FCF gives a much clearer view of the ability to generate cash (and thus profits).It is important to note that negative free cash flow is not bad in itself. If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.FCF is a better indicator than the P/E Ratio and here's why - Read Free Cash Flow Yield: The Best Fundamental Indicator and FCF: Free, But Not Always Easy

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RELATED FAQS
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  4. What are the key differences between financial risk and business risk to a company?

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  5. When evaluating terminal value, should I use the perpetuity growth model or the exit ...

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  6. How can I use market capitalization to evaluate a stock?

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  7. How can you calculate free cash flow to equity (FCFE) in Excel?

    Free cash flow (FCF) is a measure of the financial performance of the business. FCF is calculated by determining the operating ... Read Full Answer >>
  8. What are analysts looking for when they use free cash flow to equity (FCFE)?

    Analysts use free cash flow to equity (FCFE) to determine whether a company has enough cash available to pay its shareholders ... Read Full Answer >>
  9. How do you calculate operating cash flow in Excel?

    Calculating free cash flow is useful for investors and lenders to evaluate the success of a company. To create an Excel spreadsheet ... Read Full Answer >>
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    When you review a company's balance sheet or income statement, you run into a breakdown of cash flow. Ostensibly, the cash ... Read Full Answer >>
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    Despite all the differences among companies, there are only a few sources of funds available to all firms. 1. They make ... Read Full Answer >>
  14. How do changes in working capital affect a company's cash flow?

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