What is free cash flow? Free Cash Flow

Free cash flow, often abbreviated as FCF, refers to the cash flow a company generates from its operations after deducting capital expenditures that can be used to distribute dividends, repay debt, or make other investments. Free cash flow is the actual money available to the company. Free cash flow can reflect the company's operating conditions and can also be used to make certain value judgments on companies that issue equity. Cash flow from operations refers to the cash inflow obtained by a company from selling goods or providing services in daily operating activities, minus the net cash outflow paid to maintain these operating activities, reflecting the actual amount of cash generated by the company's operations. Capital expenditures refer to the expenditure of funds by a business to purchase, maintain or upgrade its long-term assets. These assets include buildings, equipment, machinery, land, and intangible assets such as patents and software, typically those with a useful life of more than one year To calculate a company's free cash flow, you can find information that can be used to calculate it on the company's Cash Flow Statement, Income Statement, and Balance Sheet. Free cash flow tells you how much cash a company has left after paying the costs of maintaining its business. Investors can estimate the possibility of receiving dividends and the stability of dividends through the free cash flow of listed companies. Therefore, free cash flow is an important indicator for evaluating the company's operating conditions. Free cash flow calculation example When calculating free cash flow, you need to first calculate or find: cash flow from operations, and capital expenditures. You can check out the article What is Capital Expenditure to learn how to calculate capital expenditure for a company. Here, we find “Payments for acquisition of property, plant and equipment” directly from Apple’s September 2023 cash flow statement, and its value is $10,959 million. So, Capital expenditures = $10,959 million In addition, cash flow generated from operations can also be obtained directly from the cash flow statement. As shown in the image below, find “Cash generated by operating activities” and its value is $110,543 million. Free cash flow = $110,543 million – $10,959 million = $99,584 million What guidance does free cash flow have? Free cash flow is an important measure of the value of a company's available assets. A positive free cash flow indicates that the company's overall business is running well, and a company with sufficient free cash flow can provide more options for the company's development. Companies with rising free cash flow are generally doing well and may be considering expansion. As an investor, looking for companies with rapidly growing free cash flow can be a good investment strategy, because growing free cash flow indicates that the company's future earnings may also surge, and it also shows that the company has sufficient ability to repay debt and pay dividends. As a result, when a company's free cash flow is rising but its stock price is low, it will be more attractive to investors, and the likelihood that they will receive earnings and that the stock's value will appreciate is greater. In contrast, shrinking free cash flow means that the company may not be able to maintain earnings growth. The lack of earnings growth may force the company to borrow more debt, which will greatly affect its attractiveness to investors. However, low free cash flow doesn't always indicate problems with a company's operations. Because when companies pursue rapid expansion, they are often accompanied by declining free cash flow. Especially When initiatives such as new product development, acquisitions, and investments occur, these business activities will temporarily reduce free cash flow. FAQ