Free Cash Flow Calculator
Calculate free cash flow (FCF) — the cash a business generates after paying for the capital expenditures needed to maintain and grow its asset base. FCF is the cash available for debt repayment, dividends, share buybacks, or reinvestment.
What Is Free Cash Flow?
Free cash flow (FCF) is the cash a business generates after paying for the capital expenditures required to maintain and grow its operations. It is what remains from operating cash flow after capex, and it represents the cash available for distribution to investors or reinvestment in the business.
FCF is the single most important metric in valuation because it is the cash that belongs to all capital providers (debt and equity) after the business has invested in itself. A business with strong FCF can pay dividends, buy back shares, pay down debt, or acquire competitors. A business with weak or negative FCF must raise more capital — often on unfavorable terms.
Free Cash Flow Formula
FCF = Operating Cash Flow − Capital Expenditures
More complete version with working capital explicitly separated:
FCF = CFO − Capex + Change in Working Capital
- CFO — operating cash flow (cash generated from core business)
- Capex — capital expenditures (spending on property, plant, equipment)
- Change in working capital — cash used or freed by changes in receivables, inventory, payables
Worked Example
A business has OCF = $95,000, capex = $30,000, and working capital increase of $10,000:
FCF = $95,000 − $30,000 − $10,000 = $55,000
FCF / OCF = $55,000 ÷ $95,000 = 57.89%
Capex / OCF = $30,000 ÷ $95,000 = 31.58%
Interpretation: the business generates $95K in operating cash flow, spends $30K on capex and $10K on working capital, leaving $55K in free cash flow. This $55K is available for debt repayment, dividends, buybacks, or reinvestment. An FCF/OCF ratio of 58% is healthy — the business is generating enough cash to grow while still returning cash to investors.
FCFF vs FCFE
There are two versions of free cash flow, depending on which capital providers you are measuring:
- FCFF (Free Cash Flow to Firm) — cash available to all capital providers (debt and equity). Calculated as CFO + Interest × (1 − Tax) − Capex − WC change. Used in enterprise value DCF valuation.
- FCFE (Free Cash Flow to Equity) — cash available to equity shareholders only. Calculated as FCFF − Interest × (1 − Tax) + Net Borrowing. Used in equity DCF valuation.
This calculator produces a simplified FCF that is approximately FCFE for a business with no debt. For FCFF or FCFE specifically, additional adjustments are needed.
How to Interpret FCF
- FCF strongly positive, FCF/OCF > 60% — healthy. Business generates substantial cash after investing.
- FCF positive, FCF/OCF 30–60% — normal. Business covers capex but has less cash for distribution.
- FCF positive but FCF/OCF < 30% — capex-heavy. Common in capital-intensive industries.
- FCF near zero — the business is breaking even on cash. All operating cash is consumed by capex and WC.
- FCF negative — the business is consuming more cash than it generates. Requires financing. Common in rapid growth but dangerous if sustained.
Frequently Asked Questions
What is a good free cash flow?
Positive FCF is the goal. Higher is better, but the right number depends on the business model. Software businesses often have FCF/OCF above 70% because capex is minimal. Manufacturers may have 30–50% because capex is high. The key metric is FCF trend and sustainability — is FCF growing, stable, or declining? A business with growing FCF is fundamentally strong.
What is the difference between FCF and net income?
Net income is an accounting measure of profit. FCF is the actual cash available after paying for operations and capital expenditures. Net income includes non-cash items (depreciation) and ignores working capital and capex. FCF is the harder, real number — the cash a business actually produces after investing in itself. In valuation, FCF is used far more than net income because it directly reflects cash returns.
Should I use FCF or EBITDA for valuation?
FCF is theoretically superior because it accounts for capex and working capital — real cash outflows that EBITDA ignores. But FCF can be volatile (lumpy capex) and harder to forecast. EBITDA is more stable and easier to compare across companies. In practice, both are used: EV/EBITDA for quick comparables, and DCF on FCF for detailed intrinsic valuation. For capital-intensive businesses, FCF is usually more reliable than EBITDA.
How do I increase free cash flow?
Three levers: increase OCF (grow revenue, raise margins, improve working capital), reduce capex (buy instead of build, lease instead of own, defer non-critical spending), or reduce working capital (collect receivables faster, reduce inventory, stretch payables). Many businesses improve FCF fastest by improving working capital — a one-time $100K improvement in working capital is a one-time $100K boost to FCF.
Can free cash flow be negative?
Yes. Negative FCF means the business is spending more on capex and working capital than it generates from operations. This is common in rapid-growth businesses, start-ups, and companies making large investments in new capacity. Negative FCF is fine if it is temporary and funded by available cash/financing. Persistent negative FCF without a clear path to positive is dangerous — the business is consuming capital faster than it generates it.
Does FCF include interest payments?
The simple FCF formula (CFO − Capex) includes interest payments because CFO is calculated after interest paid. If you want FCFF (free cash flow to firm — before interest), you would add back after-tax interest: FCFF = CFO + Interest × (1 − Tax) − Capex − WC change. FCFE (free cash flow to equity) is calculated after interest and after net borrowing: FCFE = CFO − Capex + Net Borrowing. Which version to use depends on whether you are valuing the whole firm or just the equity.