Free cash flow (or net cash flow) is an indicator that shows the financial value of a company.
It consists of calculating the money available to the organization after paying for production inputs, operating expenses and investments.
And when we talk about being available, we are referring to the money that the business can use to meet its financing debts and/or distribute it among its partners.
Therefore, it is the result of calculating the result of subtracting operating and investment expenses from income.
It should not be confused with other indicators such as cash flow.
Free Cash Flow Calculation
As can be seen from what we have just said, the FCF calculation does not take into account the leverage of the business, its calculation is independent of whether or not there is external financing because its result is the amounts that are normally going to be delivered to those who have contributed resources, whether these partners or external financiers.
For its calculation we will start from the Gross Operating Margin (Sales minus costs of sales and general expenses), which will give us the profit before taxes and interest (BAIT) also taking into account other factors such as inventories and depreciations.
In the end, free cash flow will be that net profit plus depreciation minus fixed asset investments and minus investment in NOF (operating cash requirements).
Importance of Free Cash Flow (FCF)
As we have seen we can say, in very simple words, that the Free Cash Flow is what remains of the company’s activity after meeting its expenses.
It is very important as an indicator of the profitability of the business as it will be what investors have left to receive for their contribution to the business.[ratings]