Free Cash Flow Calculator

Free cash flow is the money that a company has left over after it pays its operating expenses and maintains its capital assets. It represents the actual amount of cash available to a company for use in its operations without affecting its regular business activities.

This is the reason investors often prefer free cash flow over profit. While net income is a book value that can be affected by depreciation schedules and accrual accounting principles, free cash flow represents the actual amount of money generated after investments into assets have been made.

If you select an existing data row and add capital expenditures, the result will be shown while typing. With additional options, you can also perform calculations per share, use them as a price-earnings ratio or return on sales, or compare with planned targets.

What is free cash flow?

Free cash flow is the amount of cash generated from operating activities, minus capital expenditures required to maintain and grow those activities. All other definitions are just rephrasings of this sentence.

Capital spending is subtracted because a company can't keep the cash it spends on new trucks, machines or data centers. Only what's left over can be used for dividends, share buybacks, debt reduction and acquisitions.

In determining actual cash flows, free cash flow can reveal problems that are overlooked by profit metrics. For example, if inventory is continually piling up or customers are delaying their payments, the cash flow may be exhausted earlier than what is reflected in earnings per share.

Formula for calculating free cash flow:

Operating cash flow is the sum in the bottom section of the first column of the statement of cash flows and is usually referred to as "net operating cash flow". Capital expenditures are a section of investing activities with the most common item being the purchase of property, plant and equipment.

For example, let's say a company reports operating cash flow of 500 million and makes investments of 120 million during the same year.

Thus the free cash flow is 380 million if you subtract 120 from 500. This means that about three-quarters of operating cash flows have survived reinvestment during the year, which is shown by the graph displayed below the calculator.

Three input values, one result.

The publicly available calculators give different views on where to start the calculation but these differences are not of a mathematical nature; they depend on which financial statements the reader has in front of them.

If a cash flow statement is available, it can be used directly. As all the relevant information such as net profit, non-cash expenses and changes in working capital are already included, there is no need to prepare one from scratch.

If only an income statement and some adjustment data are available, the operating cash flow is re-computed starting from net profit. Depreciation and amortization are added because they do not represent actual cash movements, while changes in working capital are subtracted as they actually result in disbursements or receipts.

If you start with operating profit, then taxes are calculated first, followed by the same two adjustments. This is the approach used in valuation models because it intentionally ignores how a company finances its capital.

If the input data is correct all paths will give the same result. The calculation tools show the operating cash flow for the second and third path derived from the input data so that it can be compared with the actual values reported to identify any missing items.

Pay attention to signs of changes in working capital.

Working capital is an area where it's easy to make mistakes. If you understand the direction, there's no way that you can go wrong on the questions.

If net working capital increases, the cash is not remaining on the bank account but in receivables or inventories. This represents a use of cash and must be subtracted. If it decreases, then cash is being freed up, which must be added.

In this calculator, enter the increase in net working capital. Enter a positive number if working capital has increased and a negative number if it has decreased.

Free cash flow is not the same as net cash flow.

If you're looking for a tool to calculate cash flow, half of the results describe something else. Net cash flow is the sum of all inflows minus outflows and includes borrowing money or issuing stock.

Free cash flow intentionally excludes the financing activities. A company can have a healthy net cash flow by borrowing money but that doesn't say anything about whether or not the business is actually able to generate cash. Free cash flow answers this question while net cash flow does not.

Interpretation of key figures: profit margins, values per share, returns and payback periods.

Raw data becomes meaningful only when it is compared to a benchmark. Three metrics form the core of many analyses and calculation tools generate these three metrics.

The free cash flow margin compares the free cash flow to sales, which allows for comparison of a company with its own historical results or similar competitors.

The free cash flow per share is a comparable metric to earnings per share and provides insight into the effects of dilution. The free cash flow yield compares the value of one share with its market price.

Two methods of calculating the yield give the same result, because market capitalization is the product of stock price and number of shares issued. The calculator calculates the yield based on market capitalization and shows it next to each other for easy comparison.

The inverse of the yield is the payback period. It indicates how many years it takes for a company to recoup the price paid by investors for the entire company through free cash flow. If the yield is 5.6 percentage points, then the payback period is about eighteen years.

A high yield does not automatically mean something is cheap. In many cases it indicates that the market expects a reduction in cash flow and should be considered as a starting point for analysis rather than a definitive answer.

What negative free cash flow means:

A negative free cash flow means a company's capital expenditures were higher than the cash generated by operating activities for that year, but this fact alone doesn't explain much.

Companies that are laying fiber optic cables, opening new branches or building factories can have negative free cash flow for some time because these expenses represent the core of investments. Another scenario is an established company where sales remain stable but free cash flow remains negative. In this case, the deficit must be covered by loans or issuing shares.

What's important is whether this phenomenon occurs repeatedly and in which direction the development moves. A year with high expenses is not a reason for concern yet, but if it lasts over several years and does not go along with corresponding sales growth, then it can be a worrying pattern.

Free cash flow, FCFF, FCFE

The three terms refer to a common concept, with the difference being in the origin of cash flow.

A company's free cash flow is also referred to as unlevered free cash flow and is the money available to all those who provide capital to the business before interest is paid. This includes lenders. It corresponds to the results obtained from the EBIT path described above, and correlates with the weighted average cost of capital when valuing.

The equity free cash flow is also called levered free cash flow and it takes into account interest and debt changes in addition to leaving only the money that belongs to the shareholder. It corresponds with the cost of capital for equity.

The normal free cash flow, which is the number that this calculator mainly calculates, is a practical version used to assess the attractiveness and financial health of a company. It can be directly extracted from the statement of cash flows in an annual report and does not involve any financing assumptions.

Where to find individual data:

All the data required for this calculator is contained within two financial statements. Open up your annual or quarterly report and review these two statements in succession.

The names of individual items may vary from company to company, and there is no uniform general definition for investment expenses. If you use the same items over time, then the trends observed are real and not just a result of changes in definitions.

This calculator is for educational and analytical purposes only and does not constitute investment advice. As free cash flow should ideally be looked at over multiple periods of time, you should extract data from several years before drawing conclusions based on a single period.