Free Cash Flow (FCF)
Estimates cash left after the business funds the capital expenditure needed for its operations.
Formula
Free Cash Flow = Operating Cash Flow - Capital Expenditures
Worked example$1.5 billion of operating cash flow minus $0.5 billion of capital expenditure gives $1.0 billion of FCF.
Calculation steps
- Find operating cash flow: $1.5 billion.
- Find capital expenditure: $0.5 billion.
- Subtract capex from OCF to get $1.0 billion.
How to interpret it
Positive and growing FCF can fund acquisitions, buybacks, dividends, and debt reduction without outside financing.
Industry context
Capital-intensive industries naturally reinvest more. Separate maintenance investment from growth investment when disclosures allow.
Common mistakes
- Use the correct sign for capital expenditure.
- Do not ignore working-capital swings.
- Check whether asset sales or supplier financing boosted cash temporarily.