Everything about Free cash Flow Simplified!
What we will talk about in this 🧵🧵:
1⃣What is Free Cash Flow
2⃣How to calculate Free Cash Flow
3⃣Types of Free Cash Flow
4⃣Importance & Limitations of Free Cash Flow
Let's dive in ⤵️⤵️
What is Free Cash Flow?
Free cash flow means the cash that is left over after a company pays for its operating expenses and capital expenditures (Capex) like purchasing new machinery, equipment, land & building, etc. and satisfying all its working capital needs.
In simple words, suppose whatever cash that is left with you after you spend your salary or income is known as Free cash flow that you can use for different purposes.
The more FCF a company has, the better it is. Businesses which generate high FCF can:-
1⃣Give investors higher dividends
2⃣Do share buybacks
3⃣Build a war chest for acquisitions or Capex.
4⃣Reinvest in the business when opportunity arises with lesser dependence on debt.
How to calculate Free Cash Flow👇:
To calculate free cash flow, all you need to do is open the Cash Flow Statement and subtract "Net Capital expenditure" from "net cash from operating activities".