![]() ![]() While FCF includes interest expense for the period, it does not include new debt that the company may take on or account for debt that it pays off. The basic FCF formula-operating cash flow minus capital expense-tells you the amount of money left over after the business has met all its obligations, from both the operating and capital perspectives, in that period. Still, all three views of free cash flow represented by the FCF metrics can offer insights into the business that are valuable to different stakeholders. They differ primarily based on how each metric treats debt. There are three main types of free cash flow metrics. Investors use a variation-levered free cash flow, also called free cash flow to equity (FCFE )-to indicate how much cash could potentially be redistributed to shareholders in the form of dividends.Ĭompanies that don’t have much cash left over after all the bills are paid often find it difficult to borrow or attract investors.Creditors use FCF to help determine how much debt a company can support.Business managers use FCF to monitor performance and inform plans for future expansion.That’s why FCF is such a crucial measure of a business’ health.įCF metrics are invaluable for business managers, creditors and investors: But they also need cash to develop new products, expand operations and make acquisitions-the activities by which companies live and die over the long term. Companies need cash to pay their operating expenses and other immediate financial obligations. In business, profits are important but cash is singularly vital. ![]() It’s volatile by nature so it should be analyzed over several periods and viewed in conjunction with other metrics. But by itself, free cash flow can be misleading.
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