Free Cash Flow (FCF)

What is FCF?

Free cash flow (FCF) is a measurement of how efficient a company is to generate cash. It is the cash inflow of a company subtracting cash outflow that is related to the company's operations and maintenance. Here is the calculation of FCF:

• Free Cash Flow= ​Operating Cash Flow −Capital Expenditures
• Free Cash Flow = Net Income + Depreciation and Amortization - Change in Working Capital - Capital Expenditure

Why Is It Important?

Free cash flow serves as the bedrock in the calculation of a company's intrinsic value. It is used because it reveals the financial health of a company’s business operation (which is the core of a company) while blocking the effect of capital expenditure (often referred to as CAPEX).

The discounted cash flow model indicates that all future free cash flow discounted back at WACC is the intrinsic value of a company. By applying the discounted cash flow model, investors can estimate whether a company is undervalued, overvalued, or fairly valued.

To learn more about the discounted cash flow model (DCF), click: DCF: Using Excel.