How to Calculate Free Cash Flow
What is Free Cash Flow?
Free Cash Flow (FCF) = Operating cash flow - Capital expenditures. Shows cash available to debt/equity holders after reinvestment.
Step-by-Step Guide
- 1Calculate operating cash flow from statement
- 2Subtract capex for maintenance and growth
- 3FCF shows true distributable cash
Worked Examples
Input
Operating CF $500M, capex $150M
Result
FCF = $350M available for shareholders/debt
Often differs from net income
Common Mistakes to Avoid
- ✕Using net income instead of OCF
- ✕Not separately tracking maintenance vs. growth capex
Frequently Asked Questions
Why is FCF important?
Better than earnings for valuation; cash flows matter, not accounting adjustments.
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