Calculate free cash flow, FCF yield, and free cash flow to equity. Use the FCF formula to evaluate a company's true cash-generating power and make smarter investment decisions.
Calculate FCF using the direct method (from operating cash flow) or the indirect method (from net income).
FCF = Operating Cash Flow − Capital Expenditures
FCF = Net Income + D&A − ΔWC − CapEx
Estimate free cash flow starting from revenue using operating margin, tax rate, and capital needs.
NOPAT − Net Capital Spending − ΔWC = FCF
Calculate how much free cash flow you're getting per dollar invested in a stock.
FCF Yield = (FCF per Share / Stock Price) × 100
FCFE = FCF + Net Borrowing − Debt Repayment
See how operating cash flow breaks down into free cash flow and how FCF yield varies by sector.
Free cash flow (FCF) is the cash a business generates from operations after subtracting capital expenditures needed to maintain or grow its asset base. It represents the money actually available for shareholders — through dividends, share buybacks, debt repayment, or strategic acquisitions.
Net income is an accounting figure that includes non-cash items like depreciation and can be influenced by accounting decisions (revenue recognition timing, asset write-downs, deferred taxes). Free cash flow strips away these distortions and shows the actual cash a company produces.
A company can report growing net income while burning cash — a dangerous mismatch. Conversely, capital-intensive businesses may show modest earnings but generate substantial free cash flow. This is why Warren Buffett focuses on "owner earnings," which is essentially free cash flow.
Direct method: Start with operating cash flow from the cash flow statement, then subtract capital expenditures. This is the simplest and most common approach.
Indirect method: Start with net income, add back non-cash charges (depreciation and amortization), subtract changes in working capital, then subtract capital expenditures.
1. Find Operating Cash Flow on the company's cash flow statement (also called "cash from operations"). 2. Find Capital Expenditures under "investing activities" on the same statement. 3. Subtract CapEx from OCF. The result is free cash flow. If FCF is positive, the company generates more cash than it needs to maintain its business. If negative, it's spending more than it earns — which may be fine for a growing company but is a red flag for a mature one.
Understanding the differences between these three metrics is essential for proper financial analysis.
| Feature | Free Cash Flow | Net Income | Operating Cash Flow |
|---|---|---|---|
| What it measures | Cash after all capital needs | Accounting profit (bottom line) | Cash from core operations |
| Includes CapEx? | ✓ Yes (subtracted) | ✗ No (uses depreciation) | ✗ No |
| Non-cash items | ✓ Excluded | ✗ Included | ✓ Adjusted for |
| Easy to manipulate? | ✓ Harder | ✗ Easier | Moderate |
| Best used for | Valuation, dividend safety | Earnings-based multiples (P/E) | Operational health check |
| Found on which statement? | Calculated (OCF − CapEx) | Income statement | Cash flow statement |
| Key valuation metric | Price/FCF, FCF yield | P/E ratio | P/OCF ratio |
Use these four criteria to quickly assess whether a company's free cash flow profile signals financial strength.