The formula
How to calculate free cash flow
Free cash flow is the cash a business generates after paying for the assets it needs to keep operating. It is the money genuinely available for dividends, buybacks, debt repayment or acquisitions — and it is much harder to massage than profit.
Both figures come straight from the cash flow statement. Some analysts subtract only maintenance capex, on the grounds that growth capex is discretionary; that is more informative but requires a judgement the accounts do not make for you.
What to enter:
- Operating cash flow
- Capital expenditure — purchases of property, plant and equipment from the cash flow statement
- Revenue
No submit button: type and the answer moves. Your inputs end up in the link, so the page can be shared already filled in.
Worked example
Work through the defaults on this page:
- Operating cash flow: 92,000,000
- Capital expenditure: 34,000,000
- Revenue: 480,000,000
That gives:
- Free cash flow: 58,000,000
- Free cash flow margin: 12.08 %
- Capex as a share of operating cash flow: 36.96 %
Reading the result
The margin is the comparable figure across companies. Software businesses routinely convert 20–30% of revenue into free cash flow; retailers and manufacturers with heavy asset bases operate in low single digits, and that is normal rather than a warning.
Where this goes wrong. Reading a single year. Capex is lumpy — a new factory can wipe out free cash flow in the year it is built while improving the business permanently. Average three to five years before drawing conclusions.
Profit includes non-cash charges like depreciation and depends on judgements about revenue timing. Free cash flow tracks money actually moving, which makes it harder to flatter and closer to what pays a dividend.
Yes, and routinely so for a fast-growing one investing ahead of revenue. The question is whether the spending is building something that earns a return, and whether the funding to reach that point is secured.
The answer it gives you is free cash flow. With 92,000,000 operating cash flow, 34,000,000 capital expenditure and 480,000,000 revenue, that comes to 58,000,000. Change any field and the figure moves with it.