Free cash flow (FCF) is a stock valuation measure that can indicate performance and discern business activity that has not yet affected net income. Unlike net income, FCF excludes non-cash expenses and includes equipment and other capital asset spending. Investors can calculate it based on publicly available income statement and balance sheet data.
Free Cash Flow
FCF is defined as the cash from company operations less capital expenditures. The cash from company operations includes the net income, after adding back non-cash expenses like depreciation on machinery, less the change in working capital (current assets less current liabilities).
Large amounts of FCF can indicate strong performance. However, if the firm’s revenue, earnings, and FCF are strongly divergent, the firm may be experiencing internal issues or process inefficiencies that have yet to impact revenue or earnings.
A Stock Valuation Measure
The FCF model is one of many valuation models financial advisors use to evaluate stocks. Wealth advisors track FCF over time and forecast its future values, accounting for debt and non-operating assets, to estimate share value. Note that because FCF includes capital asset spending and companies tend to purchase fixed assets on an as-needed basis rather than regularly, FCF may appear inconsistent.
Considering the FCF trends, the number of shares outstanding, and the net debt issued, investors can calculate the free cash flow per share (FCFPS). FCFPS tells shareholders how much cash flow the company generates per share.
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This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.