FCF – What is Free Cash Flow?

Free cash flow (FCF) is the cash a company has left over after covering its operational costs and maintaining its capital assets.

What sets FCF apart from other cash flow metrics like earnings or net income is that it focuses on actual cash profitability, leaving out non-cash expenses found in the income statement. It also takes into account investments in equipment and assets, along with any shifts in working capital from the balance sheet.

Learn more about FCF

Free cash flow is basically the cash a company has left over to pay off its debts or distribute dividends and interest to its investors. It’s the cash that’s readily available to handle any financial obligations.

Some investors like to look at free cash flow (FCF) or FCF per share instead of traditional earnings or earnings per share (EPS) when assessing profitability. This preference comes from the fact that earnings and EPS exclude non-cash items from the income statement. However, since FCF includes spending on things like property, plant, and equipment (PP&E), it can be a bit inconsistent and fluctuate over time, which might make it trickier for analysis.

Investment bankers and analysts who want to assess a company’s potential performance with various capital structures often turn to different forms of free cash flow, such as free cash flow for the firm and free cash flow to equity, which take into account interest payments and borrowing.

Conclusion

Keeping an eye on a company’s free cash flow (FCF) and its trends over time can really help investors when they’re thinking about buying stock. Shareholders often look at FCF to see if the company can afford to pay dividends or interest, while lenders might check it out to assess if the company can handle more debt.

You won’t find free cash flow directly on financial statements, so you’ll need to calculate it using other figures. Luckily, many financial websites offer a quick summary or a graph showing the FCF trend for publicly traded companies.