what is free cash flow to the firm fcff 
free cash flow to the firm fcff represents the amount of cash flow from operations available for distribution after accounting for depreciation expenses taxes working capital and investments fcff is a measurement of a company s profitability after all expenses and reinvestments it is one of the many benchmarks used to compare and analyze a firm s financial health investopedia michela buttignolunderstanding free cash flow to the firm fcff fcff represents the cash available to investors after a company pays all its business costs invests in current assets e g inventory and invests in long term assets e g equipment fcff includes bondholders and stockholders as beneficiaries when considering the money left over for investors the fcff calculation is an indicator of a company s operations and its performance fcff considers all cash inflows in the form of revenues all cash outflows in the form of ordinary expenses and all reinvested cash to grow the business the money left over after conducting all these operations represents a company s fcff free cash flow is arguably the most important financial indicator of a company s stock value the value price of a stock is considered to be the summation of the company s expected future cash flows however stocks are not always accurately priced understanding a company s fcff allows investors to test whether a stock is fairly valued fcff also represents a company s ability to pay dividends conduct share repurchases or pay back debt holders any investor looking to invest in a company s corporate bond or public equity should check its fcff a positive fcff value indicates that the firm has cash remaining after expenses a negative value indicates that the firm has not generated enough revenue to cover its costs and investment activities in the latter case an investor should dig deeper to assess why costs and investment exceed revenues it could be the result of a specific business purpose as in high growth tech companies that take consistent outside investments or it could be a signal of financial problems the calculation for fcff can take several forms and it s important to understand each version the most common equation is the following fcff ni nc i 1 tr li iwc where ni net income nc non cash charges i interest tr tax rate li long term investments iwc investments in working capital begin aligned text fcff text ni text nc text i times 1 text tr text li text iwc textbf where text ni text net income text nc text non cash charges text i text interest text tr text tax rate text li text long term investments text iwc text investments in working capital end aligned fcff ni nc i 1 tr li iwcwhere ni net incomenc non cash chargesi interesttr tax rateli long term investmentsiwc investments in working capital free cash flow to the firm can also be calculated using other formulations other formulations of the above equation include fcff cfo ie 1 tr capex where cfo cash flow from operations ie interest expense capex capital expenditures begin aligned text fcff text cfo text ie times 1 text tr text capex textbf where text cfo text cash flow from operations text ie text interest expense text capex text capital expenditures end aligned fcff cfo ie 1 tr capexwhere cfo cash flow from operationsie interest expensecapex capital expenditures fcff ebit 1 tr d li iwc where ebit earnings before interest and taxes d depreciation begin aligned text fcff text ebit times 1 text tr text d text li text iwc textbf where text ebit text earnings before interest and taxes text d text depreciation end aligned fcff ebit 1 tr d li iwcwhere ebit earnings before interest and taxesd depreciation fcff ebitda 1 tr d tr li fcff iwc where ebitda earnings before interest taxes depreciation and amortization begin aligned text fcff text ebitda times 1 text tr text d times text tr text li phantom text fcff text iwc textbf where text ebitda text earnings before interest taxes depreciation text and amortization end aligned fcff ebitda 1 tr d tr lifcff iwcwhere ebitda earnings before interest taxes depreciationand amortization if we look at exxon s statement of cash flows we see that the company had 8 519 billion in operating cash flow below in blue in 2018 the company also invested in new plant and equipment purchasing 3 349 billion in assets in blue the purchase is a capital expenditure capex cash outlay during the same period exxon paid 300 million in interest subject to a 30 tax rate 1fcff can be calculated using this version of the formula fcff cfo ie 1 tr capex begin aligned text fcff text cfo text ie times 1 text tr text capex end aligned fcff cfo ie 1 tr capex in the above example fcff would be calculated as follows fcff 8 5 1 9 million 3 0 0 million 1 3 0 fcff 3 3 4 9 million 5 3 8 billion begin aligned text fcff 8 519 text million 300 text million times 1 30 phantom text fcff 3 349 text million 5 38 text billion end aligned fcff fcff 8 519 million 300 million 1 30 3 349 million 5 38 billion the difference between cash flow and free cash flow to the firm fcff cash flow is the net amount of cash and cash equivalents being transferred into and out of a company positive cash flow indicates that a company s liquid assets are increasing enabling it to settle debts reinvest in its business return money to shareholders and pay expenses cash flow is reported on the cash flow statement which contains three sections detailing activities those three sections are cash flow from operating activities investing activities and financing activities fcff is the cash flows a company produces through its operations after subtracting any outlays of cash for investment in fixed assets like property plant and equipment and after depreciation expenses cash flow taxes working capital and interest are accounted for in other words free cash flow to the firm is the cash left over after a company has paid its operating expenses and capital expenditures special considerationsalthough it provides a wealth of valuable information that investors appreciate fcff is not infallible crafty companies still have leeway when it comes to accounting sleight of hand without a regulatory standard for determining fcff investors often disagree on exactly which items should and should not be treated as capital expenditures investors must thus keep an eye on companies with high levels of fcff to see if these companies are under reporting capital expenditures and research and development companies can also temporarily boost fcff by stretching out their payments tightening payment collection policies and depleting inventories these activities diminish current liabilities and changes to working capital but the impacts are likely to be temporary 