If you are a business owner of a firm/company then you must know the importance of Free Cash Flow (FCF) also known as the leftover cash after accounting for capital expenditures. FCF is also the indicator of company’s health and performance in the market. A person who is running a business has a good leftover cash after paying for capital expenditures, including buildings and equipment can freely decide on future ventures to enhance the shareholder value.
FCF shows the signs of a public listed company in the stock market. Free cash flow is not only important for a business owner but also for investors who take this into consideration to make smart investment decisions on the FCF generated by the company. If a company is expected to realize large increases in free cash flow, thus it makes a center of attention to various investors. If a company has enough cash to pay investors through shares buybacks and dividends after paying for capital expenditures then we can say that the company has more potential in terms of cash and profits.
There are other lots of benefits of having healthy leftover cash but before we mention those, it would be important to learn, how to calculate FCF accurately?
If you are running a business and having trouble calculating free cash flow then this go-to guide is definitely for you.
Different Ways to Calculate Free Cash Flow (FCF)
Well, there are multiple ways to calculate the free cash flow of a company and the good thing is, different methods will yield the same answer. To find the accurate answer you can approach any method of calculating FCF.
FCF = Net Cash Flow – Capital Expenditures
Here’s the free cash flow is the function of net cash flow from operations and capital expenditures. It can be calculated by subtracting capital expenditures such as building and property required for current operations from the net cash flow of operations.
FCF = Net Operating Profit after Taxes (NOPAT) – Net Investment in Operating Capital
Here NOPAT is the difference between Sales Revenue and Operating Costs and Taxes.
Free Cash Flow (FCF) Analysis – Final Thoughts
In a nutshell, we can say that a healthy FCF puts a good impression on the investors in indicating that you have enough cash to expand, develop, and buyback stock etc. So, if an investor finds a company with rising FCF and undervalued share price then it would be a good opportunity for the investor to invest in the company.
Bottom line, “A healthy Free Cash Flow is beneficial for both company and investor who is planning to invest in for future gains.”
Hope! this would’ve helped you in calculating the FCF of your business and get the more clear image. Nevertheless, if you have any queries you can leave in the comment section below.