How to Determine Free Cash Flow

Understanding free cash flow (FCF) is crucial for evaluating the financial health of a company. To determine FCF, you need to start with the operating cash flow and then adjust for capital expenditures. Here’s a step-by-step guide to calculating FCF:

1. Start with Operating Cash Flow: This figure is found on the cash flow statement and represents the cash generated from the company's core business operations. It's calculated as net income plus non-cash expenses and changes in working capital.

2. Subtract Capital Expenditures: Capital expenditures (CapEx) are investments in physical assets like property, plant, and equipment. These are also listed on the cash flow statement. Subtracting CapEx from operating cash flow gives you the FCF.

3. Adjust for Changes in Working Capital: If your company has significant changes in working capital, such as large changes in accounts receivable or payable, you should adjust for these to get a more accurate picture of cash flow.

4. Consider Non-Operating Cash Flows: Sometimes, cash flows from non-operating activities, such as sale of assets or investments, might affect FCF. Adjust these to get a true sense of free cash available to the company.

5. Review the Results: Compare the FCF with industry benchmarks or historical data to evaluate the company's performance and sustainability. A positive FCF indicates a company is generating more cash than it is using for capital expenditures, which is a good sign of financial health.

By following these steps, you can accurately determine a company's free cash flow and gain insights into its financial stability and operational efficiency.