The Free Cash Flow (FCF) formula is equal to cash from operations minus capital expenditures. It's the amount of money left after paying capital expenditures (CapEX) and operating expenses (OpEx). This formula helps evaluate a company's financial performance and ability to produce cash that's available to distribute.

Free cash flow analysis helps company leaders and investors determine their financial performance. It provides an analysis of how much the company can produce next after paying for assets like equipment and property. It also calculates other big investments for its operational cash flow. The FCF formula helps to evaluate an organization's ability, which investors care the most about.

What is Free Cash Flow (FCF)?

It refers to how much money the company has left after dealing with all expenses, including operating capital costs, equipment and salary costs, and capital expenses like paying debts or investing in new projects. Accumulating cash and making investments that a business should have is important. You can understand where your company is currently standing by calculating working capital and FCFC.

A positive cash flow figure highlights the company's generating more revenue than needed to cover operating costs. Negative cash flow figures highlight the organization's not having enough money left after dealing with operational activities. This could be a sign of the company's poor financial health.

How to Calculate Free Cash Follow?

There are many methods to calculate free cash flow; one of the popular methods to calculate free cash is to use the operating cash flow formula:

Free cash flow = operating cash flow- capital expenditures

Where,

Operating cash flow is the revenue a company makes by subtracting its operating costs.

Capital expenditures refer to the money that a company uses to maintain assets like land, equipment, and buildings.

Find financial documents

You can utilize various financial document to calculate free cash flow, but the mostly used document is the statement of cash flow from the company. The statement from the company already highlights any minor changes in working capital and non-cash expenses. Use the balance sheet and income statement of the company to calculate the amount of money earned and paid off by the company.

Evaluate the cash flow for operating activities

It's the amount of money that an organization needs to continue operating. You can find out this detail in your company's financial documents. You can understand how much money investors can withdraw before it disrupts operations and find out the money that the company doesn't use for operations.

Use the FCF formula and perform the calculation

Gather the value to find out the free cash flow of the company, then use a formula to perform calculations. Consider a company having a capital expenditure of $50K and an operating cash flow of $150K. We can perform calculations for FCF as follows:

$150K - $50K = $100K

It means that investors can get $100K from the company before any disruption happens. It's up to investors how they want to use that money. They can reinvest in the company to improve any process or operation, and they can invest in other companies, too.

How can I improve free cash flow?

How much free cash flow a company has is not a fixed number. It's highly changeable in many businesses, but there is always a way to improve how much FCF you should have in your hands. If you just started your business, consider a way to track your expenses. You can also reschedule your instalments for the debts that you have to pay.

A good idea is to hire a financial advisor who can guide you about paying your debts with a lower interest rate. The advisor will build a financial strategy to grow your business. If your free cash flow is negative, you have to take aggressive moves, like reconsidering your operations. By understanding the FCF of your business, you can track its ongoing progress and take action to pay debts and grow your business.

Pros and cons of free cash follow

Pros

Free cash flow can offer an in-depth analysis of an organization's financial health. Understanding the fundamentals of free cash flow offers valuable information to investors because FCF is made up of various financial statements.

By performing the free cash flow analysis, a company can understand what needs improvement so that it can attract more investors and expand its business. A positive FCF highlights that the company is self-sufficient in paying debts. In contrast, a negative FCF indicates that the organization has to borrow money to continue its operations.

It shows how much potential a company has to generate revenue. Investors are looking for a company with greater free cash flow, which will offer them lucrative returns. For investors, free cash flow is a strong parameter to check out the financial stability of a company because it offers an analysis of whether a company can pay off debts or not and what the share value of the company is.

Cons

Capital expenditures may vary from one year to another, which can influence the free cash flow. So, it's crucial to measure the organization's FCF after a regular interval of time. Smart investors always search for organizations with high free cash flow, but the price of shares is underrated. Growing cash flow is usually seen as a growth sign in the market.

It is crucial to know that if an organization has a positive, it's a sign that the company isn't investing in its business as it should invest in, like upgrading equipment and its production plant. In contrast, negative cash flow doesn't mean that the company is facing a financial crisis; it could be investing in its market share, which will ultimately lead to business growth.