The Concept Of Free Cash Flow (FCF)

The Concept Of Free Cash Flow (FCF)

Free cash flow (FCF) is equal to the after-tax operating earnings of the company plus non-cash charges less investments in working capital, plant, property and equipment (or PP&E), and other assets.

FCF is the cash flow generated by a company that is available to all providers of capital, both debt and equity.

The table illustrates how free cash flow can be derived from financial statements or results of a financial modeling and financial valuation exercise.

  2008 2009 2010 2011 2012
Revenue 1,200 1,380 1,587 1,746 1,920
Operating Expenses (960) (1,104) (1,238) (1,362) (1,498)
EBIT 240 276 349 384 422
Taxes (96) (110) (140) (154) (169)
Net Operating Profit 144 166 209 230 253
plus Depreciation 30 33 37 41 46
Gross Cash Flow (A) 174 199 246 271 299
           
Change in Working Capital 9 18 21 16 17
Capital Expenditure 72 83 95 105 115
Include in Other Assets 3 10 2 3 3
Gross Investment Total (B) 84 111 118 124 135
           
FREE CASH FLOW (A - B) 90 88 128 147 164


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