Tuesday, 27 December 2011

What is Free Cash Flow (FCF)?

FCF represents the cash a firm has generated for its shareholders, after paying its expenses and investing in its growth.

FCF = Total cash flow (Earnings with noncash charges added back in)  - capital spending

FCF can be very useful in assessing a company's financial health because it strips away all the accounting assumptions built into earnings.

A company's earnings maybe high and growing, but until you look at FCF, you don't know if the company's really generated money in a given year or not.

If you're an owner, FCF is ultimately what you're interested in.  FCFs represent real cash.  Earnings do not.


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