Everything about Free cash Flow Simplified!
What we will talk about in this š§µš§µ:
1ā£What is Free Cash Flow
2ā£How to calculate Free Cash Flow
3ā£Types of Free Cash Flow
4ā£Importance & Limitations of Free Cash Flow
Let's dive in ⤵ļøā¤µļø
What is Free Cash Flow?
Free cash flow means the cash that is left over after a company pays for its operating expenses and capital expenditures (Capex) like purchasing new machinery, equipment, land & building, etc. and satisfying all its working capital needs.
In simple words, suppose whatever cash that is left with you after you spend your salary or income is known as Free cash flow that you can use for different purposes.
The more FCF a company has, the better it is. Businesses which generate high FCF can:-
1ā£Give investors higher dividends
2ā£Do share buybacks
3ā£Build a war chest for acquisitions or Capex.
4ā£Reinvest in the business when opportunity arises with lesser dependence on debt.
How to calculate Free Cash Flowš:
To calculate free cash flow, all you need to do is open the Cash Flow Statement and subtract "Net Capital expenditure" from "net cash from operating activities".