ModeldrillFree cash flow
Free cash flow (FCF) = cash flow from operations - capital expenditures. It is the cash a company generates after reinvesting in its fixed assets, available to repay debt, pay dividends or buy back shares. Free cash flow to equity (FCFE) also adds net borrowing.
Syntax
FCF = CFO - CapEx; FCFE = Net income + D&A - CapEx - change in NWC + net borrowing| Part | What it is |
|---|---|
CFO | Cash flow from operations, from the cash flow statement |
CapEx | Purchases of property, plant and equipment, a positive spend amount |
Net borrowing | New debt raised minus debt repaid in the period |
Examples
CFO = 500, CapEx = 120
=500 - 120Result: 380
The simplest FCF, often called levered FCF because CFO is after interest.
FCFE: Net income 200, D&A 50, CapEx 80, NWC increase 20, net borrowing 30
=200 + 50 - 80 - 20 + 30Result: 180
FCF margin: FCF 380 on revenue 2,000
=380 / 2000Result: 19.0%
Common mistakes
- Adding capex instead of subtracting it: the cash flow statement shows capex as a negative number, so FCF = CFO + (negative capex), not CFO plus the absolute amount.
- Confusing FCF with UFCF: FCF from CFO is after interest, so it belongs to equity holders and should not be discounted at WACC.
- Ignoring working capital: a growing company can show positive net income and negative FCF because receivables and inventory absorb cash.
Practice Free cash flow
These drills check your answer on live data, free, no account needed.
- Cash flow from operationsNet working capital balances are given for each year end, including 2025. Fill the change in working capital (row 8) and cash flow from operations (row 9): net income plus depreciation less the increase in working capital.
- Unlevered free cash flowFill NOPAT (row 6: EBIT after tax at the rate in B2) and unlevered free cash flow (row 10: NOPAT plus depreciation, less capital spending, less the increase in working capital).
Questions
What is the difference between free cash flow and net income?
Net income is an accounting profit after non-cash charges like depreciation. FCF is cash: it adds back non-cash items, subtracts working capital growth and subtracts capex, which net income never includes.
Is free cash flow the same as FCFE?
Close. FCF from the cash flow statement (CFO - capex) ignores debt flows; FCFE also adds net borrowing, so it is the cash that could actually go to shareholders.
Related
- Unlevered free cash flowUnlevered free cash flow = EBIT x (1 - tax rate) + D&A - capex - increase in net working capital. Examples from EBIT and from EBITDA, plus the sign rules.
- Cash flow from operationsCFO = net income + D&A + other non-cash charges - increase in working capital. How the indirect method works line by line, a worked example and sign errors.
- Change in net working capitalChange in NWC = NWC this year - NWC last year. An increase uses cash and is subtracted in free cash flow; a decrease releases cash. Formula, examples, signs.
- DCF model stepsThe six steps of a DCF: forecast unlevered free cash flow, set WACC, compute terminal value, discount it all, bridge to equity value and divide by shares.