Free cash flow (FCF) refers to the cash flow that a company can freely use. The formula for calculating free cash flow is operating cash flow minus capital expenditures. Operating cash flow represents the company's increased cash inflow through various operating activities, such as sales of commodities and investments. Capital expenditures include new assets, such as land, plant, equipment, R&D, etc., invested by the company in order to maintain its existing competitiveness or create more potential profits in the future. Free cash flow can reflect the efficiency of a company's cash generation and its ability to bear various needs such as allocating funds and giving back to investors.
The specific calculation steps are as follows:
1.Find the company's cash flow statement, find its net cash flow and capital expenditure items;
2.Free cash flow = net cash flow - capital expenditures.
In general, the higher the free cash flow, the more cash the company has to return to shareholders and invest in future business and expansion. Conversely, if free cash flow is decreasing, it may mean that the company is unable to sustain profitable growth, raise debt levels, or even have insufficient liquidity to maintain its operations.
It should be noted that when calculating free cash flow, it is necessary to determine whether the cash flow in trading activities is one-time or other cyclical factors. In addition to this, investors can also use free cash flow as a measure of value, which can be used to evaluate a company's operating and growth potential. For example, if the company's free cash flow is on a positive growth trend, it may mean that the company will increase its revenue and be able to reward investors with excess money. Conversely, if free cash flow is in a negative trend, it may indicate that the company is unable to sustain its sustained earnings growth. Investors need to judge on a case-by-case basis whether a change in free cash flow represents a company's long-term profitability and potential. Cash flow management