What is Free Cash Flow – FCF Formula Made Simple

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“What is free cash flow. And how can we nuse. It and stick around until until the end because in the end. I m gonna give you a nquick and way to calculate free cash flow.

But even when we have that it ncould be helpful to know what it is where it comes from and how we can use nit. So let s start with what is free cash flow. Nbroadly speaking free cash flow is defined as cash flow that is available nto the firm s investors this includes bond investors and stock investors to nillustrate let s simply imagine that a company is nothing more than a way to nprocess cash cash comes into the company in the form of revenue as it sells its nproducts or services. The company then takes that cash and pays operating nexpenses for things like salaries next.

The company makes short and long term..

Ninvestments short term. Investments. Include things like inventory and nreceivables. They call.

This working capital. While long term. Investments nwould account for things like investments in their property plant. Or nequipment.

Often called pp e..

For short. What remains is the firm s free cash nflow. Eligible to be paid out to the company s investors often this is called nfree cash flow to the firm next. The company is obligated to take care the nbond investors since bond investors are higher up the pecking order and stock ninvestors.

So with their free cash flow to the firm. They pay the interest they nowe to the bondholders. They may also pay bond principal or perhaps even nborrow more money with new bonds if they choose so after all bondholders are ntaken care of what remains is known as free cash flow to equity. So free cash nflow to equity is what remains for investors in the company stock.

After nfunding working capital needs fixed capital needs and debt financing..

Now nthis is not necessarily. What the stock investors get the board of director nstill gets to decide that the company can use that free cash flow to pay out ndividends or perhaps do stock buybacks or it could elect to keep that money ninternally for the company so potential investors can use free cash flow as a way nto value. A company and a company s stock in something called discounted cash flow. Nvaluation.

Often called dcf valuation for short basically. In a discounted cash flow analysis. We would project future free ncash flow and then discount it back to today discounting means to account for nthe fact that a dollar today is worth more than a dollar next year. So i walked nyou through what free cash flow is and how it comes about and there are many nvariations of formula that allow for you to calculate free cash flow.

But many ntimes analysts will simply take cash flow from operations which you get from nthe cash flow statement and subtract capital expenditures..

Which is also in nthe cash flow statement and there you have it a rough estimate of free cash nflow. Now this calculation would generally get you closest to free cash nflow to the firm. So that is the basics of free cash flow and how you can use it. If you liked this video and found it informative hit the thumbs up and if you nhaven t done so already hit the ” .


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