The Valuation NodeThe Valuation Node
    Cash Flow Checks

    Free Cash Flow

    FCF

    Free cash flow is operating cash flow minus the cash the business is forced to reinvest to keep running and growing. It is the money that is genuinely surplus.

    Formula

    Free Cash Flow

    FCF = Cash Flow from Operations − Capital Expenditure

    Benchmark: Positive and growing; negative FCF must be funded by debt or new equity

    Reading the number

    Start with ₹20, buy two pencils, sell them for ₹30. Profit ₹10, cash received ₹10. But a business is a going concern; it has to keep operating and growing. Tomorrow you must buy three pencils with that ₹10. Free cash flow is zero, because the ₹10 is a compulsion, not a surplus. You cannot gift it or burn it.

    Now you sell 1,000 pencils a day. ₹10,000 buys them and ₹15,000 comes back. You have decided that 1,000 a day is your steady scale, so tomorrow needs only ₹10,000. The extra ₹5,000 is free cash flow. Burn it and the business is unaffected.

    In a real company the reinvestment is the repair and replacement of plant that wears out. A cement maker sells profitably and cash arrives, but after a year the machines have degraded and new ones are needed. What is left after that spend is FCF, the true surplus available for dividends, reserves, acquisitions, or investments. FCF is neither profit nor cash flow: profit is just a booked sale, and not all cash is bonus money.

    Indian example

    Related ratios

    CFO to PAT RatioPrice to Cash Flow RatioEnterprise Value

    Glossary terms

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