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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