Free Cash Flow Calculator

Operating Cash Flow
Capital Expenditures
Free Cash Flow  =  10000

Free Cash Flow Calculator

Free Cash Flow (FCF) Calculator
uses values of operating cash flow and capital expenditures, to find out the free cash flow for our business.
    A free cash flow calculator is a tool that helps to compute the free cash flow value, which is one of the most important results from the analysis of cash flows. It is necessary to follow the next steps:
  • Enter the value of the Operating cash flow. The value must be positive;
  • Enter the value of the Capital expenditures. The value must be positive;
  • Press the ”Calculate” button to make the computation;
Free Cash Flow (FCF):
The free cash flow can be calculated by the following formula

FCF = Operating cash flow − Capital expenditures
What is Free Cash Flow?
    Free cash flow is used in literature and practice as an important factor in enterprise valuation models. It is a category that, about profit, is less exposed to manipulation and unrealistic presentation and can form a good basis for determining the real value of capital and business operations of the company. The value of the equity of the company or the company as a whole can be related to the expected amounts of free cash flow in subsequent periods, so that the FCF increase can be used as an instrument to increase the value of the company or equity. The calculation of free cash flow is one of the most important results from the analysis of cash flows. Simply put, free cash flow is cash that a company has gone after paying the capital costs it has incurred, such as new plant or equipment. Some describe free cash flow as money that a company has left to pay investors after fulfilling all its financial obligations, but it is more complicated than that. The reason investors began to look at the concept of free cash flow is that it was not easy to manipulate as earnings per share or net income.

How to calculate FCF?

    There are three different methods to calculate free cash flow because all companies don’t have the same financial statements. But, here we will present the most common and simplest method. To perform a proper calculation, we need to know operating cash flow and capital expenditures, both obtained from the cash flow statement.
    To calculate FCF, find the cash flow from operations (also referred ”net cash from operating activities”) and subtract capital expenditure, which can be found on the balance sheet. The formula for the free cash flow is
FCF = Operating cash flow − Capital expenditures
    Operating cash flow is net cash that depends on the company’s operations. It has much better access to real cash earnings than EBITDA or net income. EBITDA does not take into account working capital, i.e. when investors compare the company only with EBITDA, it does not matter whether the company spends 4% of revenue for its own needs or spends 40%. Then the net income does not take into account the capital invested in that period. It can be assumed that this is the depreciation of the purchased assets through the income statement, but this does not include the actual cash used for new business or the purchase of new equipment in a given period. The free cash flow includes the actual capital expenditures Capital expenditures (or CAPEX) represent the amount of money that represents business growth during the period for which we perform analyzes. It includes technology, new equipment, infrastructure.
    For example, let us calculate Ann’s cash flow for 2020, according to the company’s statement, if cash flow from operating activities is $1 million and capital expenditures are $550, 500.

FCF = $1, 000, 000 − $550, 000 = $450, 000
    FCF can provide valuable insights into a company’s value and the health of its fundamental trends since it accounts for shifts in working capital. A drop in accounts payable (outflow), for example, could indicate that vendors are demanding faster payment. A drop in accounts receiv- able (inflow) could indicate that the business is receiving money from its customers. Assume a company’s net income was $50,000,000 per year for the previous decade. On the surface, that appears stable, but what if FCF has been declining for the past two years due to rising invento- ries (outflow), customers delaying payments (outflow), and vendors requesting faster payments (outflow) from the firm? In this case, FCF will show a serious financial vulnerability that would have been missed if only the income statement had been examined.

What does FCF represent to investors?

    Free cash flow is the money left after all the costs of the company and we can say that it is the money of the investor. This money can be used for the following purposes, which is decided by the owner of the company:
  • Debt principal payments;
  • Payment of dividends;
  • Redeems shares;
  • Acquisitions;
    That is why we must have a stable and growing free cash flow. In case the free cash flow falls, we can suspect that there are business problems.
    Investors should avoid firms that have a negative free cash flow or that simply do not report a free cash flow. So a successful and developed and well-to-do company can be recognized by monitoring its free cash flow.

Some of the reasons a company can increase its FCF

    From the free cash flow formula, we have three reasons why a firm can increase its FCF:
  • working capital is reduced so that the company can use operating money;
  • the company increases net income;
  • the money is reduced according to CAPEX, so the FCF will not grow much.