What is Free Cash Flow (FCF)?
The Short Answer
Free Cash Flow (FCF) explained simply
Free Cash Flow (FCF) is a measure of financial performance. It shows how much cash a company has left after paying for its day-to-day operations and investing in its assets, like property or equipment. Think of it as the money a business can freely use for things like paying down debt, issuing dividends, buying back stock, or expanding the business.
Real-World Example
The Coffee Shop Scenario
Imagine a coffee shop. In a year, it brings in $500,000 from coffee sales. Its operating expenses (beans, rent, salaries) are $300,000. It also spends $50,000 on a new espresso machine (capital expenditure).
To calculate FCF:
$500,000 (Revenue) - $300,000 (Operating Expenses) - $50,000 (Capital Expenditure) = $150,000 (Free Cash Flow)
This $150,000 is the cash the coffee shop has available to do whatever it wants with, after keeping the business running and up-to-date.
Why this matters
FCF is important because it shows the true financial health of a business. A business with strong FCF can grow, pay off debt, and reward its owners. It’s a key indicator for buyers looking at a business, as it shows how much cash they can expect to take out or reinvest.
Buyers look at FCF to see how much cash a business can generate. The higher the FCF, the more attractive the business is to a buyer.
Buyers look at FCF to see how much cash a business can generate. The higher the FCF, the more attractive the business is to a buyer.
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