what is free cash flow fcf 
free cash flow fcf represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets unlike earnings or net income free cash flow is a measure of profitability that excludes the non cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital from the balance sheet interest payments are excluded from the generally accepted definition of free cash flow investment bankers and analysts who need to evaluate a company s expected performance with different capital structures will use variations of free cash flow like free cash flow for the firm and free cash flow to equity which are adjusted for interest payments and borrowings jessica olah investopediaunderstanding free cash flow fcf free cash flow is the money that the company has available to repay its creditors or pay dividends and interest to investors some investors prefer to use fcf or fcf per share rather than earnings or earnings per share eps as a measure of profitability because the latter metrics remove non cash items from the income statement however because fcf accounts for investments in property plant and equipment pp e it can be lumpy and uneven over time making it less useful for the purpose of analysis benefits of free cash flowbecause fcf accounts for changes in working capital it can provide important insights into the value of a company and the health of its fundamental trends a decrease in accounts payable outflow could mean that vendors are requiring faster payment an increase in accounts receivable inflow could mean the company is collecting cash from its customers more quickly an increase in inventory outflow could indicate a building stockpile of unsold products including working capital in a measure of profitability provides an insight that is missing from the income statement for example assume that a company made 50 000 000 per year in net income each year for the last decade on the surface that seems stable but what if fcf was dropping over the last two years as inventories were rising outflow customers started to delay payments inflow and vendors began demanding faster payments outflow in this situation fcf would reveal a serious financial weakness that wouldn t be apparent from an examination of the income statement looking at fcf is also helpful for potential shareholders or lenders who want to evaluate how likely it is that the company will be able to pay its expected dividends or interest if the company s debt payments are deducted from free cash flow to the firm fcff a lender would have a better idea of the quality of cash flows available for paying additional debt shareholders can use fcf minus interest payments to predict the stability of future dividend payments free cash flow is often evaluated on a per share basis to evaluate the effect of dilution similar to the way that sales and earnings are evaluated limitations of free cash flowimagine a company has earnings before interest taxes depreciation and amortization ebitda of 1 000 000 in a given year also assume that this company has had no changes in working capital current assets current liabilities but it bought new equipment worth 800 000 at the end of the year the expense of the new equipment will be spread out over time via depreciation on the income statement which evens out the impact on earnings but because fcf accounts for the cash spent on new equipment in the current year the company will report 200 000 fcf 1 000 000 ebitda 800 000 equipment on 1 000 000 of ebitda that year if we assume that everything else remains the same and there are no further equipment purchases ebitda and fcf will be equal again the following year in this situation an investor will have to determine why fcf dipped so quickly one year only to return to previous levels and if that change is likely to continue moreover understanding the depreciation method being used will garner further insights for example net income and fcf will differ based on the amount of depreciation taken per year of the asset s useful life if the asset is being depreciated using the book depreciation method over a useful life of 10 years then net income will be lower than fcf by 80 000 800 000 10 years for each year until the asset is fully depreciated alternatively if the asset is being depreciated using the tax depreciation method the asset will be fully depreciated in the year it was purchased resulting in net income equaling fcf in subsequent years calculating free cash flowfcf can be calculated by starting with cash flows from operating activities on the statement of cash flows because this number will have already adjusted earnings for non cash expenses and changes in working capital investopedia sabrina jiangthe income statement and balance sheet can also be used to calculate fcf investopedia sabrina jiangother factors from the income statement balance sheet and statement of cash flows can be used to arrive at the same calculation for example if ebit was not given an investor could arrive at the correct calculation in the following way investopedia sabrina jiangwhile fcf is a useful tool it is not subject to the same financial disclosure requirements as other line items in the financial statements this is unfortunate because if you adjust for the fact that capital expenditures capex can make the metric a little lumpy fcf is a good double check on a company s reported profitability although the effort is worth it not all investors have the background knowledge or are willing to dedicate the time to calculate the number manually luckily there is software that helps make the calculation easier 