Definition
Free cash flow is cash generated by operations minus capital expenditures. FCF is a key measure of financial sustainability.
Formula
Free cash flow = operating cash flow - capital expenditures
Example
If operating cash flow is $1.2M and capex is $300k, free cash flow is $900k.
How to use it
- Use FCF to compare how efficiently revenue turns into cash.
- Negative FCF is common during growth, but trend and drivers should be clear.
- Separate maintenance capex from growth capex when evaluating durability.
Common mistakes
- Treating EBITDA as a proxy for FCF without adjusting for working capital.
- Ignoring seasonality in collections that swings operating cash flow.
Measured as
Free cash flow = operating cash flow - capital expenditures
Misused when
- Treating EBITDA as a proxy for FCF without adjusting for working capital.
- Ignoring seasonality in collections that swings operating cash flow.
Operator takeaway
- Use FCF to compare how efficiently revenue turns into cash.
- Negative FCF is common during growth, but trend and drivers should be clear.
- Separate maintenance capex from growth capex when evaluating durability.
- Tie Free Cash Flow (FCF) to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Valuation modeling hub: WACC, DCF, multiples, and equity value if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Free Cash Flow (FCF) belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Valuation modeling hub: WACC, DCF, multiples, and equity value: A practical hub for valuation modeling: estimate a discount rate (WACC), run a simple DCF with sensitivity analysis, and translate enterprise value to equity value.