Free cash flow calculator

Free cash flow is what is left after a business has paid its running costs and spent what it needed to spend to keep operating. It is the number a DCF starts from, because it is the cash genuinely available to the people who own the company.

It is harder to flatter than earnings. Net income runs through depreciation schedules, accruals and a good deal of judgement; cash either arrived or it did not. That is why it is the figure to check when reported profits look better than the business feels.

Both inputs sit on the cash flow statement. Operating cash flow is the top section's total, and capital expenditure appears under investing activities, usually as purchases of property, plant and equipment.

Free cash flow = operating cash flow - capital expenditure

A company reporting $1,000m of operating cash flow and $300m of capital expenditure.

1. 1Take operating cash flow as reported: $1,000m.
2. 2Subtract what was spent on property, plant and equipment: $300m.

• Compare it against net income over several years. Cash flow persistently below reported profit is worth understanding, and the explanation is sometimes ordinary and sometimes not.
• Negative free cash flow is not automatically bad. A company building capacity can be spending well. A company that has been negative for years without the revenue to show for it is a different case.
• Look at the trend rather than one year. A single large acquisition of equipment can make an excellent year look poor.

• Entering capital expenditure as a negative number. The cash flow statement shows it as an outflow, but the formula already subtracts it, so enter it as a positive amount.
• Including acquisitions in capex. Buying other companies is not maintenance of the existing business, and mixing them makes the figure incomparable year to year.
• Ignoring stock-based compensation, which the cash flow statement adds back as a non-cash expense even though it genuinely dilutes existing owners.

What each of these inputs actually is, where it comes from in a filing, and where it misleads.