How to Calculate Free Cash Flow (Formula and Example)
Short answer. Subtract capital expenditures from operating cash flow. A company with $500 million of operating cash flow and $150 million of capex has free cash flow of $350 million, the cash left after maintaining and growing its asset base and available for debt, dividends or buybacks.
The formula
Free cash flow = Operating cash flow - Capital expenditures
Step by step
- Find operating cash flow. Take it from the cash flow statement, cash from operating activities.
- Find capital expenditures. Purchases of property, plant and equipment, also on the cash flow statement.
- Subtract. Operating cash flow minus capex.
- Cross-check. Alternative route: EBIT x (1 - tax rate) + depreciation and amortization - capex - increase in working capital.
Worked example
A company with the following annual figures
- Operating cash flow $500M, capital expenditures $150M.
- FCF = 500 - 150 = $350M.
- With 100M shares, FCF per share = $3.50.
Common mistakes
- Using net income instead of operating cash flow.
- Ignoring stock-based compensation, which flatters cash flow.
- Treating one lumpy capex year as typical.
Frequently asked questions
Is free cash flow the same as profit?
No. Profit includes non-cash items and accounting timing; FCF tracks cash.
Can free cash flow be negative?
Yes, for growing companies that invest heavily. It is a concern only if sustained without a path to positive cash flow.
What is FCF yield?
Free cash flow divided by market capitalization.
General education, not personal financial advice. Example figures are illustrative.