Cash available to all capital providers after funding operations and investments.
free_cash_flowAlso: FCFFree Cash Flow (Unlevered) represents the cash generated by a business that is available to all capital providers (debt and equity) after funding operating expenses and capital investments. It is the numerator in a DCF valuation and represents the true cash-generating power of the operating business.
FCF is the ultimate measure of financial performance because it cannot be manipulated by accounting choices. It represents real cash that can be used for debt repayment, dividends, buybacks, or reinvestment.
After-tax operating income plus non-cash charges minus investment.
= Operating_Cash_Flow - CapExStarting from reported cash flow statement
= NOPAT + D&A - CapEx - ΔNWCBuilding from net operating profit after tax
Should be calculated consistently with how you derive WACC. Unlevered FCF excludes interest expense and is discounted at WACC. Levered FCF includes interest and is discounted at cost of equity.
Free Cash Flow is the actual cash a business generates that could be taken out without affecting operations. Think of it as the "owner's cut" after funding the business.
Build FCF from first principles: start with EBIT, tax it, add back non-cash charges, subtract investments. This helps you understand each component's impact.
Stress test your FCF by varying CapEx intensity and working capital efficiency. Small changes in these assumptions can significantly impact valuation.
Consider FCF conversion (FCF/Net Income) as a quality metric. High conversion suggests earnings are real; low conversion may indicate aggressive accounting or heavy reinvestment needs.