Free Cash Flow
Definition
Cash generated by operations after reinvestment in the business, available to capital providers.
How It Works
Start with operating earnings, add back non-cash charges, subtract capital expenditures and working capital increases.
Formula
FCFF = EBIT(1-T) + D&A - CapEx - ΔNWC
Example
With EBIT of $200K after 25% tax, $30K D&A, $50K CapEx, $10K ΔNWC: FCFF = $120K.
Common Misconceptions
- ✗FCF equals net income
- ✗Depreciation is a real cash cost
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Common questions about Free Cash Flow
FCFF is before debt payments (for all investors). FCFE is after debt payments (for equity holders only).
Earnings include non-cash items like depreciation and accruals. Free cash flow measures actual cash generated, which determines a firm's ability to pay dividends, repay debt, and invest in growth.