What is Free Cash Flow (FCF)?

Free Cash Flow (FCF) is the cash a company generates from its operations after accounting for capital expenditure required to maintain or expand its business. Generally, FCF is calculated using the following formula:

• FCF = Cash Flow from Operations (CFO) – Capital Expenditure (CAPEX)

Where, 

• CFO = Net Profit + Non-Cash Expenses ± Changes in Working Capital

In the above formula:

• Net Profit = Profit after tax

• Non-Cash Expenses = Depreciation, amortisation, etc.
• Changes in Working Capital = Changes in receivables, inventory, payables, and other operating assets/liabilities

For example, suppose a company generates ₹500 crore from operating activities and spends ₹150 crore on property, plant, and equipment. Now, FCF would be ₹350 crore (₹500 crore – ₹150 crore).

How to Perform the FCF Calculation for an Indian Company?

The required figures can generally be obtained from the company’s cash flow statement and financial statements. When analysing FCF, investors can compare it across multiple years and examine whether cash generation is supported by operating profits. However, note that FCF can vary substantially across industries because capital expenditure requirements differ.

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