What is Free Cash Flow - FCF Formula Made Simple | Summary and Q&A

TL;DR

Free cash flow is the cash available to a company's investors after deducting operational expenses, investments, and debt financing. It can be used to value a company and its stock through discounted cash flow valuation.

Key Insights

• 🥶 Free cash flow is the cash available to a company's investors after deducting expenses, investments, and debt financing.
• 🧑‍⚕️ It can be used by both bond investors and stock investors to assess a company's financial health.
• 💐 Free cash flow can be utilized in discounted cash flow valuation to determine the value of a company and its stock.
• 🥶 It is important for investors to understand the concept of free cash flow and its calculation.
• 🥶 Free cash flow to the firm is used to pay bondholders, while free cash flow to equity is available for stock investors.
• 🥶 Companies can choose how to allocate their free cash flow, whether to distribute it to investors or retain it internally.
• 💐 Analysts often calculate free cash flow by subtracting capital expenditures from cash flow from operations.

Transcript

so what is free cash flow and how can we use it and stick around until the end because in the end I'm gonna give you a quick and easy way to calculate free cash flow. But even when we have that, it could be helpful to know what it is, where it comes, from and how we can use it. So let's start with what is free cash flow? Broadly speaking free cash ... Read More

Questions & Answers

Q: What is free cash flow and why is it important for investors?

Free cash flow is the cash available to a company's investors after deducting expenses, investments, and debt financing. It is important for investors as it represents the cash that can be distributed to them.

Q: How is free cash flow different from cash flow from operations?

Free cash flow is calculated by subtracting capital expenditures from cash flow from operations. It represents the cash available after accounting for investments in fixed capital needs.

Q: How can free cash flow be used to value a company?

Free cash flow can be used in discounted cash flow valuation, where projected future free cash flows are discounted back to the present. It helps determine the present value of a company and its stock.

Q: Can a company choose not to distribute its free cash flow to investors?

Yes, a company has the discretion to use its free cash flow for various purposes, such as retaining it internally, paying dividends, or conducting stock buybacks.

Summary & Key Takeaways

• Free cash flow is the cash remaining after a company's revenue is used to pay operating expenses, investments, and debt financing.

• It is important for both bond investors and stock investors as it represents the cash available for distribution.

• Free cash flow can be used to value a company and its stock through discounted cash flow analysis.