Free Cash Flow (FCF)
Learn how to calculate and interpret Free Cash Flow (FCF) with its formula, a worked example, industry context and common mistakes.
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.
Accounting and market variations
Definitions, reporting choices, periods, capital structures, and market conventions can change how this metric should be compared.
- Use the correct sign for capital expenditure.
- Do not ignore working-capital swings.
- Check whether asset sales or supplier financing boosted cash temporarily.