Free Cash Flow (FCF) — free cash flows
What is free cash flow, how to calculate it and why it's one of the most important financial indicators for investors.
Definition
Free Cash Flow (FCF) is cash that remains in the company after paying all operating costs and capital expenditures (CAPEX). It's money that the company can allocate to dividends, share buybacks, debt repayment or acquisitions.
Formula
FCF = Operating cash flows − Capital expenditures (CAPEX)
Example: A company generates 500 million PLN from operating activities and spends 150 million PLN on investments.
FCF = 500 − 150 = 350 million PLN
Why is FCF more important than net profit?
Net profit is an accounting concept — it includes non-cash items like depreciation, write-offs or reserves. A company can show profit while having no cash.
FCF shows actual cash that the company has available. That's why:
- Dividends should be financed from FCF, not from accounting profit
- DCF valuation (Discounted Cash Flow) is based on FCF, not net profit
- Financial health — a company with growing FCF is in good condition
How to analyze FCF?
FCF Yield
FCF Yield = FCF / Market capitalization × 100%
If FCF Yield is 8%, it means the company generates 8 grosze of free cash for every złoty of its market value. Above 5% is usually an attractive level.
FCF Margin
FCF Margin = FCF / Revenue × 100%
Shows what percentage of revenue converts to free cash. The higher, the better. Tech companies achieve 20–30%, industrial companies 5–10%.
FCF Trend
A single FCF reading doesn't say much. The trend is important:
- Growing FCF → company is developing and generating more cash
- Declining FCF → rising costs or declining revenue
- Negative FCF → company spends more than it earns (acceptable in growth phase)
FCF and dividends
A dividend-paying company should have sufficient FCF to cover dividends with a margin. A dividend-to-FCF ratio below 70% means a safe dividend.
How Freenance can help
Freenance displays FCF and FCF Yield for companies in your portfolio, helping assess whether the dividend is safe and if the company has cash for further development.
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