What Is Trailing Free Cash Flow (FCF)?

Trailing free cash flow (FCF) measures a company's free cash flow over a period of time. The cash flow for the previous 12 months is the most commonly used figure. A trailing twelve month FCF does not have to coincide with a company's fiscal year end; it can be calculated at any point throughout the company's fiscal year using the financial data from the previous twelve months.

Key Takeaways

  • Trailing free cash flow (FCF) presents the results of a company's cash inflows and outflows over a period of time, typically the prior twelve months.
  • Trailing free cash flow does not have to be calculated on a fiscal year.
  • Trailing free cash flow is a useful figure for investors to see how much cash remains with the company after paying its necessary operating bills.
  • Free cash flow can be used to reinvest in the company or to pay external investors and creditors.

How Trailing Free Cash Flow (FCF) Works

Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Free cash flow is important to investors because it shows how much cash is left over and available to both creditors and investors after the company has spent money on its operational expenses and investments in capital. Trailing free cash flow measures the amount of leftover cash that has been generated by the company over the course of the past year.

The more free cash flow a company has, the more easily it can pay its creditors and investors and reinvest in itself. A strong trailing free cash flow multiple can be a sign that a stock is a good investment when combined with other signs of financial strength, such as increasing revenues, order and sales growth, controlled selling, general and administrative expenses costs (SG&A), increasing gross profits, and solid earnings per share.

Trailing free cash flow is used by investment analysts in calculating a company's free cash flow yield.

How to Calculate Trailing Free Cash Flow (FCF)

Trailing free cash flow can be calculated starting with the previous 12 months' earnings before interest and taxes (EBIT), then multiplying it by [1-(the firm's tax rate)]. Depreciation and amortization expenses, which were previously subtracted over the period and recorded on the income statement, are then added back to the product. Changes in working capital and capital expenditures incurred over the period are then subtracted.

Alternatively, FCF can be calculated from the Cash Flow from Operating Activities section of the Cash Flow Statement.