What is free cash flow formula?

Finance ManagementBanking & FinanceGrowth & Empowerment

Free cash flows (FCF) is the cash that generated by company after cash flow to maintain their capital assets and its operations. In other words, FCF is the cash remaining after paying taxes, payrolls etc. FCF is the effective measurement to measure company’s performance and financial health

Types

  • Free cash flow to the firm (FCFF)

    FCFF is the difference between cash flow (operating activities) and capital expenditure

  • Free cash flow to equity (FCFE)

    FCFE is difference between sum of (FCFF+net borrowing) and (Interest amount * (1- tax))

The formulae for free cash flows are as follows −

  • Using cash flow statements

    Difference between cash from operations to capital expenditure

    Free cash flow = cash (operations) – capital expenditure

  • Using income statement and balance sheet

    Difference between (sum of net income and non-cash expenses) to (sum of changes in working capital and capital expenditures)

Free cash flow = (net income + non-cash expenses) – (change in working capital + capital expenditure).

  • For the cash flow from operations or cash (operations)

    Difference between (sum of net income and non-cash expenses) to changes in working capital (non-cash)

  • For the non-cash expenses

    Sum of depreciation (D), amortization (A), stock based compensation (Cs), impairment charges (C) and investment (gain or loss) (I)

    Non-cash expenses = D+A+Cs+C+I

  • For the changes in working capital

    Difference between (accounts receivable (current year) {ARc) + inventory (current year) {Ic) + accounts payable (previous year) {APp}) to (accounts receivable (previous year) {ARp} + inventory (previous year) {Ip} + accounts payable (current year) {APc})

    Changes in working capital = (ARc+Ic+APp) – (ARp+Ip+APc)

  • For the capital expenditure

    (Difference between plant, property and equipment (current year) {(PP&E)c} to plant, property and equipment (previous year) {(PP&E)p)) + D&A

Free cash flow = (net income + (D+A+Cs+C+I)) – (((ARc+Ic+APp) – (ARp+Ip+APc)) + (((PP&E)c-(PP&Ep)) +D&A)

= (net income + non-cash expenses) – (change in working capital + capital expenditure)

Cash from operations = net income + non-cash expenses – change in working capital

Free cash flow = cash (operations) – capital expenditure

raja
Updated on 18-May-2022 08:44:38

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