Learn about the significance of Free Cash Flow (FCF), how it represents the actual amount of cash a company has at its disposal, and its importance in maintaining operations, growing the business, and understanding the sustainability of a company's dividend payments.
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
- It represents the cash available for the company to repay creditors or pay dividends and interest to investors.
- FCF reconciles net income by adjusting for non-cash expenses, changes in working capital, and capital expenditures (CAPEX).
Importance of FCF: Free Cash Flow (FCF) is an important financial metric because it represents the actual amount of cash at a company’s disposal. A company with consistently low or negative FCF might be forced into costly rounds of fundraising in an effort to remain solvent. Similarly, if a company has enough FCF to maintain its current operations, but not enough FCF to invest in growing its business, that company might eventually fall behind its competitors. For yield-oriented investors, FCF is also important for understanding the sustainability of a company’s dividend payments, as well as the likelihood of a company raising their dividends in the future.
Let’s calculate FCF in our example for DCF modeling.
