Term of the Day - 3 May 2024

Today’s Term is “Free Cash Flow (FCF)”.

Free Cash Flow (FCF) is a financial metric used to measure the amount of cash generated by a company's operations after accounting for capital expenditures necessary to maintain or expand its asset base. It represents the cash available to the company for distribution to shareholders, repayment of debt, or reinvestment in the business.

Key aspects of Free Cash Flow include:

1. Operating Cash Flow: FCF begins with the company's net operating cash flow, which is the cash generated from its core business activities, including sales of goods or services, minus operating expenses and taxes.

2. Capital Expenditures: From the operating cash flow, capital expenditures, or investments in property, plant, and equipment necessary to maintain or expand the company's operations, are subtracted.

3. Working Capital Changes: Changes in working capital, such as accounts receivable, inventory, and accounts payable, are also factored into the calculation of FCF to account for the cash impact of changes in short-term assets and liabilities.

4. Importance: Free Cash Flow is an essential measure of a company's financial health and its ability to generate cash for growth, debt repayment, and shareholder returns. Positive FCF indicates that the company has excess cash available after meeting its operational and investment needs, while negative FCF may signal financial distress or inefficiencies in capital allocation.

Overall, Free Cash Flow provides valuable insights into a company's cash-generating capabilities and its capacity to create long-term shareholder value.