## What is 'Free Cash Flow for the Firm (FCFF)'

Free cash flow for the firm (FCFF) represents the amount of cash flow from operations available for distribution after depreciation expenses, taxes, working capital, and investments are paid. FCFF is essentially a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health.

Next Up

## BREAKING DOWN 'Free Cash Flow for the Firm (FCFF)'

FCFF represents the cash available to investors after a company pays all its business costs, invests in current assets (e.g., inventory), and invests in long-term assets (e.g. equipment). FCFF includes bondholders and stockholders when considering the money left over for investors.

The FCFF calculation is a good representation of a company's operations and its performance. FCFF considers all cash inflows in the form of revenues, all cash outflows in the form of ordinary expenses, and all reinvested cash to grow the business. The money left over after conducting all these operations represents a company's FCFF.

## Calculating FCFF

The calculation for FCFF can take many forms, and it's important to understand each version. The most common equation is shown as:

FCFF = net income + non-cash charges + interest x (1 - tax rate) - long-term investments - investments in working capital

Other equations include:

FCFF = earnings before interest and taxes (EBIT) x (1 - tax rate) + depreciation - long-term investments - investments in working capital

FCFF = earnings before interest, tax, depreciation and amortization (EBITDA) x (1 - tax rate) + depreciation x tax rate - long-term investments - investments in working capital

## Benefits of Using FCFF

Free cash flow is arguably the most important financial indicator of a company's stock value. The value/price of a stock is considered to be the summation of the company's expected future cash flows. However, stocks are not always accurately priced. Understanding a company's FCFF allows investors to test whether a stock is fairly valued. FCFF also represents a company's ability to pay dividends, conduct share repurchases, or pay back debt holders. Any investor looking to invest in a company's corporate bond or public equity should check its FCFF.

A positive FCFF value indicates that the firm has cash remaining after expenses. A negative value indicates that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening. It can be a result of a specific business purpose, as in high-growth tech companies that take consistent outside investments, or it could be a signal of financial issues.

RELATED TERMS
1. ### Free Cash Flow Per Share

On a per share basis, free cash flow per share is cash available ...
2. ### Cash Flow

Cash flow is the net amount of cash and cash-equivalents being ...
3. ### Operating Cash Flow Margin

Operating cash flow margin measures cash from operating activities as ...
4. ### Enterprise Value (EV)

Enterprise Value (EV) is a measure of a company's total value, ...
5. ### Net Cash

A company's total cash minus total liabilities when discussing ...
6. ### Rate of Return

A rate of return is the gain or loss on an investment over a ...
Related Articles
1. Investing

### Corporate cash flow: Understanding the essentials

Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
2. Investing

### Free cash flow yield: The best fundamental indicator

Cash in the bank is what every company strives to achieve. Find out how to determine how much a company is generating and keeping.
3. Investing

### Cash flow statements: Reviewing cash flow from operations

Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods for calculating it.
4. Investing

### Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
5. Investing

### Evaluating A Statement Of Cash Flows

The metrics for the Statement of Cash Flows is best viewed over time.
6. Tech

### Cash Flow Is King: How to Keep it Running

Why is cash flow so important, and what steps can a business take to improve it?
7. Investing

### Why Cash Management Is Key To Business Success

Businesses need to generate a healthy cash flow to survive, but not hold too much so that inventory suffers or investment opportunities are missed.
8. Investing

### Cash Flow on Steroids: Why Companies Cheat

Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it.
9. Investing

### Cash Flow From Operating Activities

Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
RELATED FAQS
1. ### How do I discount Free Cash Flow to the Firm (FCFF)?

Find out how to perform (relatively) simple estimates of discounted future cash flow to the firm using the single-stage WACC ... Read Answer >>
2. ### What is the difference between Operating Cash Flow and Net Operating Income (NOI)?

Learn what operating cash flow and net operating income are, how the two metrics are calculated and the main difference between ... Read Answer >>
3. ### How should I evaluate a company with negative cash flow investing activities?

Understand how a negative cash flow from investing activities should be evaluated. Learn the sources and uses of cash in ... Read Answer >>
4. ### What's the formula for calculating free cash flow?

Free cash flow is the cash left over after a company pays for its operating expenses and capital expenditures. High free ... Read Answer >>
5. ### What is the difference between cash flow and fund flow?

See how cash flow and fund flow differ from each other, and why fund flow can be used very differently by accountants and ... Read Answer >>
Hot Definitions
1. ### Economies of Scale

Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
2. ### Quick Ratio

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
3. ### Leverage

Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
4. ### Financial Risk

Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
5. ### Enterprise Value (EV)

Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
6. ### Relative Strength Index - RSI

Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...