Free Cash Flow
Aussi : FCF, Free Cash Flow to Firm, Levered Free Cash Flow
Free Cash Flow is the cash a company generates from operations after funding the capital expenditures needed to maintain and grow its asset base.
What It Is
Free Cash Flow (FCF) measures the cash a business produces that is genuinely available to repay debt, return to shareholders, or reinvest beyond required maintenance. It starts from cash generated by operations and subtracts the capital spending needed to keep the business running.
The most common formula is:
FCF = Cash Flow from Operations (CFO) - Capital Expenditures (CapEx)
Unlike accounting profit, FCF strips out non-cash items (depreciation, amortization) and reflects actual cash movement, making it harder to manipulate through accruals.
Why it matters
Profit on the income statement can look healthy while a company quietly runs out of cash. FCF answers a sharper question: after keeping the lights on and investing in assets, how much real cash is left?
- Solvency signal: Positive, growing FCF shows a company can self-fund without constant borrowing.
- Valuation input: Discounted Cash Flow (DCF) models discount projected FCF to estimate intrinsic value.
- Capital allocation: FCF funds dividends, buybacks, debt paydown, and acquisitions.
How it is used in practice
Finance teams and CFOs track FCF to:
- Set realistic dividend and buyback policies tied to recurring cash, not one-off gains.
- Evaluate whether growth investments are funded by operations or by raising capital.
- Stress test liquidity under downturn scenarios.
- Compute FCF conversion (FCF divided by net income or EBITDA) to gauge earnings quality.
Analysts often distinguish Levered FCF (after interest and debt payments, available to equity holders) from Unlevered FCF (before financing, available to all capital providers).
Concrete Example
A software company reports:
- Cash Flow from Operations: $120M
- Capital Expenditures: $30M
FCF = 120, 30 = $90M.
If net income that year was $60M, FCF conversion is 90 / 60 = 150%, a strong signal that reported profit is backed by real cash. The $90M can now cover a $25M dividend, a $40M debt repayment, and still leave $25M as a cushion. A negative FCF, by contrast, would force the company to raise new debt or equity to cover its commitments.