Free Cash Flow

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Definition: Free Cash Flow

Free cash flows are a simple measurement of the financial performance of a firm with respect to its operations in an year. Though it can be calculated by using the following formula where

Free Cash Flow = Earnings before Interest and Tax (1-t) + Depreciation or Amortization – changes in Net Working Capital – Capital Expenditures

Free Cash Flow gives an overview of the business performance of the company in where we have to analyse the positive and negative cashflows. For Example, When the FCF is negative, it gives the essence that the company expenditure and liabilities are high. Similarly, when the free cash flows are positive, it gives an overview that the company is successfully earning profit able to cover its expenditures and liabilities. In a way, free cash flow is a short way to find out the financial performance of the firm. The free cash flow is used to assess the current liquidity that is available with the firm. In order to calculate the working capital, it is necessary to calculate the current assets and current liabilities.

Working capital = Current assets – Current liabilities



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