Free Cash Flow FCF: Formula to Calculate and Interpret It

Free cash flow is an important financial metric because it represents the actual amount of cash at a company’s disposal. A company with consistently low or negative FCF might be forced into costly rounds of fundraising in an effort to remain solvent. Similarly, if a company has enough FCF to maintain its current operations, but not enough FCF to invest in growing its business, that company might eventually fall behind its competitors. Free cash flow is the cash flow available for the company to repay creditors or pay dividends and interest to investors. Some investors prefer to use FCF or FCF per share over earnings or earnings per share (EPS) as a measure of profitability because these metrics remove non-cash items from the income statement.

Order to cash (OTC or O2C) is a set of business processes that involve receiving and fulfilling customer requests for goods or services. It is a top-level, or context-level, term used by management to describe the cash synonyms finance-related component of customer sales. This is another age-old slang term for money, but nobody seems to really know where it originated. Merriam-Webster says the word was first used to mean money in 1936.

More from Merriam-Webster on cash

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If we assume that everything else remains the same and there are no further equipment purchases, EBITDA and FCF will be equal again the next year. In this situation, an investor will have to determine why FCF dipped so quickly one year only to return to previous levels, and if that change is likely to continue. Like cabbage and celery, this is an old slang term that means “money” or “currency”. In the late 2000s and early 2010s, many solar companies were dealing with this exact kind of credit problem. Sales and income could be inflated by offering more generous terms to clients. However, because this issue was widely known in the industry, suppliers were less willing to extend terms and wanted to be paid by solar companies faster.

Chump change

However, because FCF accounts for investments in property, plant, and equipment (PP&E), it can be lumpy and uneven over time. Imagine a company has earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1,000,000 in a given year. Also, assume that this company has had no changes in working capital (current assets – current liabilities) but they bought new equipment worth $800,000 at the end of the year. The expense of the new equipment will be spread out over time via depreciation on the income statement, which evens out the impact on earnings. In both cases, the resulting numbers should be identical, but one approach may be preferred over the other depending on what financial information is available. Interest payments are excluded from the generally accepted definition of free cash flow.

Some believe it’s a reference to the phrase “starting from scratch” to imply that everything starts with money. The official currency of Mexico can be used in American slang to refer to dollars as well. Often used in the phrase filthy lucre to refer to a “shameful gain”, according to Merriam-Webster.

Homophones for Cash:

Definition and synonyms of cash machine from the online English dictionary from Macmillan Education. The origin of this term to mean money or cash is also unknown, but it was used in rap music starting in the 1990s. This word has been used to mean money since the beginning of the 20th century, but we don’t seem to know why.

Although the effort is worth it, not all investors have the background knowledge or are willing to dedicate the time to calculate the number manually. Quote to cash (Q2C) refers to all business processes involved in selling a product. Q2C also includes customer purchase intent, configuration pricing quoting and contract lifecycle management. An especially useful word to refer to money when you’re trying to sound like you have lots of it.

Phrases Containing cash

FCF is also helpful as the starting place for potential shareholders or lenders to evaluate how likely the company will be able to pay their expected dividends or interest. If the company’s debt payments are deducted from free cash flow to the firm (FCFF), a lender would have a better idea of the quality of cash flows available for additional borrowings. Similarly, shareholders can use FCF minus interest payments to consider the expected stability of future dividend payments. For example, assume that a company had made $50,000,000 per year in net income each year for the last decade. In this situation, FCF would reveal a serious financial weakness that wouldn’t have been apparent from an examination of the income statement alone.

• For example, if EBIT was not given, an investor could arrive at the correct calculation in the following way.
• This refers to a small amount of money, like the amount of cash a chump would have.
• These systems can supplement the O2C cycle with related technologies like order management, credit management and reporting and data management.
• Interest payments are excluded from the generally accepted definition of free cash flow.