Financial Glossary
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Free Cash Flow - FCF
- A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:
It can also be calculated by taking operating cash flow and subtracting capital expenditures.
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Free Cash Flow For The Firm - FCFF
- A measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments.
Calculated as:
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Free Cash Flow Per Share
- A measure of a company's financial flexibility that is determined by dividing free cash flow by the total number of shares outstanding. This measure serves as a proxy for measuring changes in earnings per share.
Calculated as:
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Free Cash Flow To Equity - FCFE
- This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment.
Calculated as: FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment
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Free Cash Flow Yield
- An overall return evaluation ratio of a stock, which standardizes the free cash flow per share a company is expected to earn against its market price per share. The ratio is calculated by taking the free cash flow per share divided by the share price. To illustrate:
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Price to Free Cash Flow
- A valuation metric that compares a company's market price to its level of annual free cash flow. This is similar to the valuation measure of price-to-cash flow but uses the stricter measure of free cash flow, which reduces operating cash flow by capital expenditures. This is done as companies need to maintain or expand their asset bases (capital expenditure) to either continue growing or maintain the current levels of free cash flow.
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