Free Cash Flow
Operating cash flow minus capital expenditures
What is Free Cash Flow?
Free Cash Flow (FCF) is the cash a business generates after funding all operating expenses and capital expenditures required to maintain or expand its asset base. It is the truest measure of a company's financial health: the cash available to pay dividends, repurchase shares, repay debt, or make acquisitions. Earnings (EPS) can be manipulated through accounting choices; cash is harder to fake. A company can report positive earnings while consuming cash (negative FCF), and vice versa. FCF yield (FCF / Market Cap) is increasingly used by investors as an alternative to earnings yield for valuation purposes.
Formula
FCF = Operating Cash Flow − Capital Expenditures
FCF Yield = FCF / Market Capitalisation × 100%
Operating Cash Flow = from the Cash Flow Statement
CapEx = Purchases of Property, Plant & Equipment (negative number in CF statement)
Calculator
How to Use
- 1Find operating cash flow: From the cash flow statement: "Net cash from operating activities."
- 2Find capital expenditures: Under investing activities: "Purchases of PP&E" or similar. Use the absolute value.
- 3Subtract CapEx from OCF: FCF = OCF − CapEx. Use TTM (last 12 months) for the most current view.
- 4Assess FCF quality: Consistent, growing FCF with FCF > Net Income (high cash conversion) signals quality. Divergence warrants investigation.
Worked Example
Example: Technology company
OCF (TTM)
$25B
CapEx
$3B
FCF = $25B − $3B = $22B. If market cap is $300B, FCF yield = 22/300 = 7.3%. The company generates 7.3 cents in free cash per dollar of market value annually, a meaningful yield that supports buybacks, dividends, or acquisitions. Compare to the 10yr Treasury at 4.5% for an equity risk premium of ~2.8pp.