Free Cash Flow Calculator

This online FCF Calculator allows you to calculate the value of Free Cash Flow which is a crucial metric of a company's health.

From this article, you will learn about the importance of this indicator, how it can be measured and how it can be optimized.  

What is the Free Cash Flow?

Free Cash Flow (FCF) is the cash value generated by a company from its operations decreased by the capital expenditures the company has to cover. 

While the free cash flow definition may seem very broad, it represents the company's precise value of cash available to shareholders, investors, and lenders. 

The types of FCF

We can distinguish two types of free cash flow:

• Free cash flow to the firm (unlevered FCF) - the amount of money the company has before paying its financial obligations.
• Free cash flow to the equity (levered FCF) - the amount of money the company has after paying its financial obligations.

How to calculate the Free Cash Flow Value?

Once you gather all the required information, you only need to fill out the form above or substitute the values to the FCF formula.

1. Calculate operating cash flow from the P&L or balance sheet
2. Find out the capital expenditures, which in most cases are represented by property, plant, and equipment (PPE) in the P&L.
3. Substitute both values into the below FCF formula. 

Free Cash Flow Formula

FCF = Operating cash flow - Capital expenditures

Where:

Operating cash flow 

It is the cash generated by the company in the given period. Note that you cannot put EBITDA or even EBIT here since those metrics do not always represent all the money the company generates.

Capital expenditures

Capital expenditures (a.k.a. CAPEX) are the money spent on tangible assets like plants, property, and equipment.

CAPEX can be calculated using the following formula:

​CAPEX = PPEc ​− PPEp ​+ DE

• PPEc​ - the value of the plant, property, and equipment in the current period
• PPEp​ - the value of the plant, property, and equipment in the previous period
• DE - depreciation expense​

When do you need to calculate FCF?

Calculating Free Cash Flow can be important for understanding a company's financial health, making investment decisions, planning for the future, measuring financial performance, and communicating with stakeholders.

Determining FCF value can be useful for you in the following situations:

1. Analyzing a company's financial health:
   FCF is a key indicator of its financial health, showing the cash the business generates after accounting for capital expenditures. By calculating FCF, investors, and analysts can gain insights into a company's ability to generate cash and invest in its growth.
2. Making investment decisions:
   When deciding whether to invest in a company, FCF can be an important metric. A company with a consistently positive FCF is generally considered a good investment, as it shows that the business is generating cash and has the potential to grow.
3. Planning for the future:
   By calculating FCF, companies can get a better understanding of their financial position and plan for future investments, dividends, or debt repayment.
4. Measuring financial performance:
   FCF is a metric that is commonly used to evaluate a company's financial performance over time. By comparing FCF from one year to the next, companies can identify trends and make adjustments to improve their cash flow.
5. Communicating with stakeholders:
   FCF can be a useful metric for communicating financial performance to investors, lenders, and board members. Companies can demonstrate their financial strength and growth potential by presenting FCF data.

Why is it important to keep an eye on free cash flow?

Tracking Free Cash Flow (FCF) is important for several reasons:

1. Cash is king:
   Even profitable companies may go bankrupt if they run out of cash. Do not forget about it!
2. Ability to pay dividends:
   FCF is the amount of cash available to distribute to shareholders. If a company has a consistently positive FCF, it is more likely to pay dividends and reward you and other shareholders.
3. Ability to pay off debt:
   If your company has positive FCF, you can use the cash to pay off debt. This reduces the risk of default and improves your company's creditworthiness.
4. Investment opportunities:
   FCF can be used to fund growth opportunities such as new product development, acquisitions, and expansion. With positive FCF, you gain more flexibility to invest in these opportunities.
5. Valuation:
   FCF is used by investors and analysts to value your company. A higher FCF indicates that your company is generating more cash, which can increase its valuation.

How to increase Free Cash Flow?

If you wish to improve your company's cash flow, here are some areas where you may seek optimization.

1. Increase sales:
   One of the most direct ways to increase FCF is to increase revenue by selling more products or services. You can achieve this by expanding the customer base, introducing new products or services, or increasing marketing efforts.
2. Improve pricing:
   You can also improve FCF by increasing prices for its products. This should be done carefully to ensure that it does not negatively impact sales.
3. Reduce costs:
   You may say it is rather obvious, but it is often neglected, and in most cases, there is always room for improvement. This can be achieved by streamlining operations, negotiating better prices with suppliers, or outsourcing non-core activities.
4. Manage working capital effectively:
   Working capital management is critical to maintaining positive cash flow. By optimizing inventory levels, accounts receivable, and accounts payable, you can reduce the amount of cash tied up in working capital and increase FCF.
5. Control capital expenditures:
   Capital expenditures, such as investments in equipment or property, can have a significant impact on FCF. By carefully managing these expenditures, you can reduce the amount of cash tied up in long-term assets and increase FCF.
6. Restructure debt:
   If your company has a significant amount of debt, try to restructure it to reduce interest payments and improve FCF.

Authors

Created by Lucas Krysiak on 2022-06-10 14:57:44 | Last review by Mike Kozminsky on 2022-10-14 15:34:44