What is Free Cash Flow?
FCF, or free cash flow, is net income earned from a business venture along with any depreciation or amortization that is relevant to the company. The amount of free cash flow does allow for any changes in the amount of working capital on hand as well as any shifts in capital expenditures for the period under consideration. It is free cash flow that is used by the company to honor its obligations to stockholders and others who hold debt or equity in the corporation. While not free cash in the sense that the funds can be used for anything, the cash flow is free in that it is not required to maintain the basic production functions of the company. Calculating this cash minus expenditures involves knowing such important line items as current depreciation on property, the value of intangible assets after allowing for amortization, any interest or investment income received, returns from the sale of stocks, and any monies collected as a result of selling property. Taking all these factors int
Free cash flow is simply a measure of the ability of a company to generate internal growth. This is sometimes referred to as organic growth. How is Free Cash Flow Calculated? Free cash flow is calculated by adding net income with depreciation and deferred taxes and then subtracting dividends paid and capital expenditures. Net Income + Depreciation + Deferred Taxes – Dividends Paid- Capital Expenditures = Free Cash Flow What Does It All Mean? If free cash flow is positive then the company has done a good job of managing its cash. If free cash flow is negative then the company may have to look for other sources of funding such as issuing additional shares or debt financing. If a company has a negative free cash flow and has to issue more equity shares, this will dilute the profits per share. If the company chooses to seek debt financing, there will be additional interest expense as a result and the net income of the company will suffer. When investing for dividend growth, we can assume t
Free cash flow is not “free” in the traditional sense of the word. A company can generate plenty of free cash flow, but it might not actually hand it out for free — companies do have to reinvest in their businesses to generate free cash flow. That said, free cash flow is what a company has left over at the end of the year — or quarter — after paying all its employees’ salaries, its bills, its interest on debt, and its taxes, and after making capital expenditures to expand the business. A real-life example Free cash flow is unbelievably easy to calculate, and both of the pieces you need to make the calculation can be found on the statement of cash flows. Every company files this statement in its 10-Q and 10-K filings with the Securities and Exchange Commission, and in its annual reports. The formula is as follows: Cash flow from operations – capital expenditures = free cash flow You can see the math below. I have used Motley Fool Income Investor pick Constellation Energy Group (NYSE:
Free cash flow is not free in the traditional sense of the word. A company can generate plenty of free cash flow, but it might not actually hand it out for free — companies do have to reinvest in their businesses to generate free cash flow. That said, free cash flow is what a company has left over at the end of the year — or quarter — after paying for all the salaries, bills, interest on debt, and taxes and after making capital expenditures to expand the business. A real-life example Free cash flow is unbelievably easy to calculate, and both of the pieces you need to make the calculation can be found on the statement of cash flows. Every company provides this statement in its 10-Q and 10-K filings with the Securities and Exchange Commission and in its annual reports. The formula is as follows: Cash flow from operations – capital expenditures = free cash flow You can see the math below. I have used Motley Fool Income Investor pick Constellation Energy Group (NYSE: CEG) as an example.
By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and “guesstimations” involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money. To calculate FCF, make a beeline for the company’s cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as “operating cash”).
