FCF (Free Cash Flow)

A way of measuring a company’s financial performance.

Free cash flow, or FCF, is calculated by subtracting a company’s capital expenditures from its operating cash flow. The result is the amount of money that the company is able to generate once it has accounted for the money it needs to spend to maintain or expand its asset base.

Why is FCF significant?

With firms able to use various accounting practices to adjust their earnings, some investors believe that FCF – which is tougher to ‘fake’ than earnings – provides a much clearer view of a business’s ability to generate cash and profits.

Practical Application Example

“ Calculating FCF is a relatively simple process of taking operating cash flow and subtracting capital expenditures – so if a company reports £10 million in cash from operations and £6 million of capital expenditures for the year, its FCF would be £10 million minus £6 million equals £4 million. ”