Free Cash Flow Calculator - Creative Widgets

Imagine you run a lemonade stand. Each month, you earn money from selling lemonade, but you also have expenses that you need to cover to keep your stand running and to grow your business.

It’s things like buying supplies, maintaining the lemonade machine, and paying taxes that add up.

Using a free cash flow calculator, you can quickly gauge a company’s cash flow after accounting for capital expenditures.

What Is Free Cash Flow

Free cash flow (FCF) is the amount of cash generated by a company after deducting capital expenditures (Capex) from its operating cash flow.

This metric is crucial because it shows how much cash is available for dividends, debt repayment, and growth initiatives.

It helps you determine if a company can sustain or increase its dividend payments without needing to raise additional capital.

Moreover, FCF is a key indicator of a company’s ability to pay off debts and reinvest in its business, boosting shareholder value.

It can also highlight potential issues in managing working capital, such as accounts receivable or payable.

Free Cash Flow Formula

Free Cash Flow (FCF) is calculated using the following formula:

FCF = Operating Cash Flow - Capital Expenditures (CapEx)

Where:

Operating Cash Flow: Cash generated from normal business operations. It includes revenue from sales and excludes costs such as taxes and interest payments. Here is what goes into operating cash flow:
- Net Income: The profit after all expenses are deducted.
- Non-Cash Expenses: Usually depreciation or amortization.
- Changes in Working Capital: Difference between current assets and current liabilities. Influences your cash flow.
Capital Expenditures (CapEx): Funds spent on acquiring, maintaining, or upgrading physical assets like buildings or equipment.
- Example: If you invest $100,000 in new machinery, that amount is your CapEx.

Free Cash Flow Example Calculation

To illustrate how to calculate free cash flow (FCF), let’s consider a hypothetical scenario involving the company LemonSqueezy.

Inputs

Net Income: $500,000
Depreciation: $50,000
Changes in Working Capital: -$20,000
Capital Expenditure: $100,000

Calculation

Step 1: Calculate operating cash flow.

Operating Cash Flow = $500,000 + $50,000 - ($20,000)
Operating Cash Flow = $570,000

Step 2: Calculate free cash flow.

Free Cash Flow = $570,000 - $100,000
Free Cash Flow = $470,000

LemonSqueezy’s free cash flow is $470,000. The company has $470,000 for dividends, interest payments, debt reduction, or potential investments and acquisitions.

How to Calculate Free Cash Flow Yield

Free cash flow yield is a financial metric that compares a company’s free cash flow to its market value (or enterprise value). It gives investors an idea of how much free cash flow the company generates relative to its size, helping them assess its financial health and efficiency in generating cash.

Free cash flow yield is calculated using the following formula:

Free Cash Flow Yield = (Free Cash Flow / Market Value or Enterprise Value) × 100%

Market Value (Market Capitalization): The total market value of a company’s outstanding shares. It is calculated as:

Market Value = Share Price × Number of Outstanding Shares

Enterprise Value: A comprehensive measure of a company’s total value, often used for valuation. It includes market capitalization debt and subtracts cash and cash equivalents:

Enterprise Value = Market Value + Total Debt − Cash and Cash Equivalents

Assume you have the following information for a company:

Operating Cash Flow: $500,000
Capital Expenditures: $200,000
Share Price: $50
Number of Outstanding Shares: 10,000
Total Debt: $100,000
Cash and Cash Equivalents: $50,000

Calculate Free Cash Flow (FCF):

Free Cash Flow = $500,000 − $200,000 = $300,000

Determine Market Value:

Market Value = 50 × 10,000 = $500,000

(Optional) Calculate enterprise value:

Enterprise Value= $500,000 + $100,000 − $50,000 = $550,000

Calculate free cash flow yield using market value:

Free Cash Flow Yield = (300,000 / 500,000) × 100% = 60%

(Optional) Calculate free cash flow yield using enterprise value:

Free Cash Flow Yield = (300,000/550,000) × 100% = 54.5%

A free cash flow yield of 60% means that for every dollar of market value, the company generates 60 cents in free cash flow annually. This strongly indicates the company’s ability to generate cash relative to its market size.

Comparing FCF Yield using market value and enterprise value gives investors different perspectives. Market value focuses on equity holders, while enterprise value provides a broader view that includes debt.

How to Calculate Free Cash Flow Per Share

Free cash flow per share (FCF per Share) is a financial metric showing how much free cash flow a company generates.

It helps investors understand the company’s ability to generate cash flow relative to the number of outstanding shares. Here’s how you can calculate it:

Free Cash Flow per Share = Free Cash Flow / Number of Outstanding Shares

The number of outstanding shares is typically available in the company’s financial statements or investor relations section of its website.

Say we have an FCF of $300,000 and 10,000 outstanding shares. Using the formula, we calculate free cash flow per share of $30, which means that each share of the company is associated with $30 of free cash flow.

This metric helps investors understand the cash flow generation capability of the company on a per-share basis, which can be a more meaningful measure when comparing companies of different sizes or assessing the value returned to shareholders.