Loading the player...

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.

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 = cash flow from operations + interest expense x ( 1 - tax rate ) - capital expenditures (CAPEX)

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. Net Operating Profit After Tax ...

    Net operating profit after tax is a company's potential cash ...
  3. Cash Flow

    Cash flow is the net amount of cash and cash-equivalents being ...
  4. Operating Cash Flow Ratio

    The operating cash flow ratio is a measure of how well current ...
  5. Cash Flow From Investing Activities

    Cash flow from investing activities reports the total change ...
  6. Free Cash Flow Yield

    Free cash flow yield is a financial ratio that standardizes the ...
Related Articles
  1. Investing

    Analyze cash flow the easy way

    Learn the key components of the cash flow statement, how to analyze and interpret changes in cash, and what improved free cash flow means to shareholders.
  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

    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. Learn how to read the cash flow statement.
  4. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  5. 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.
  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

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  8. Retirement

    Picking Retirement Stocks: Dividends vs. Free Cash Flow

    Instead of focusing on dividend payments, a better metric for choosing stocks for your retirement portfolio could be a company’s free cash flow (FCF).
RELATED FAQS
  1. How do net income and operating cash flow differ?

    Net income is the profit a company has earned for a period while cash flow from operating activities measures, in part, the ... Read Answer >>
  2. What are some examples of cash flow from operating activities?

    Learn about cash flow statement and cash flows from operating activities. Understand how these examples differentiate investing, ... Read Answer >>
  3. What's more important, cash flow or profits?

    Learn about the different effects of cash flow and profit have on a business and how you can use the information for your ... Read Answer >>
  4. 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 >>
  5. What is the difference between operating cash flow and net income?

    Learn how net income is an income statement for a certain period of time, while cash flow shows inflows and outflows based ... Read Answer >>
Trading Center