What is Free Cash Flow?
Free cash flow (FCF) is a measure of how much cash a company generates, after accounting for its capital expenditures. Capital expenditures are the funds that a company invests in long-term assets, such as property, plant, and equipment. FCF is an important indicator of a company’s financial health, as it shows how much cash is available for the company to pay its debt, dividends, and reinvest in its growth.
How to Calculate Free Cash Flow in Excel?
To calculate FCF in Excel, we need two inputs: operating cash flow (OCF) and capital expenditures (CAPEX). OCF is the cash flow generated from the core operations of the business, such as selling goods and services. CAPEX is the cash flow used for acquiring or upgrading long-term assets, such as buildings and machinery.
The formula for FCF is:
We can use the following steps to calculate FCF in Excel:
- Enter the OCF and CAPEX values for each year in separate cells. For example, we can enter the OCF in column B and the CAPEX in column C.
- In column D, enter the formula
=B2-C2to calculate the FCF for the first year. Drag the formula down to fill the rest of the column. - Format the cells as currency or number, as desired.
Example of Free Cash Flow in Excel
Let’s say we want to calculate the FCF for a company that has the following data:
| Year | OCF ($ million) | CAPEX ($ million) |
|---|---|---|
| 2020 | 300 | 50 |
| 2021 | 320 | 60 |
| 2022 | 340 | 70 |
| 2023 | 360 | 80 |
We can use the steps above to calculate the FCF in Excel. The result is shown below:
| Year | OCF ($ million) | CAPEX ($ million) | FCF ($ million) |
|---|---|---|---|
| 2020 | 300 | 50 | 250 |
| 2021 | 320 | 60 | 260 |
| 2022 | 340 | 70 | 270 |
| 2023 | 360 | 80 | 280 |
We can see that the FCF increases every year, which means that the company is generating more cash than it is spending on its long-term assets.
