Formula
How to Calculate Free Cash Flow
Cash generated by a business after accounting for capital expenditures — a measure of true financial health and the basis for many valuation models.
Free Cash Flow
FCF = Operating Cash Flow - Capital Expenditures
Where
- OCF
- = Cash from operating activities
- CapEx
- = Capital expenditures (PP&E, etc.)
What Is Free Cash Flow?
Free Cash Flow (FCF) is the cash a company generates from operations minus capital expenditures (CapEx) required to maintain or grow the business. FCF = Operating Cash Flow - CapEx. Unlike EBITDA (which adds back depreciation and amortization but not CapEx), FCF reflects actual cash available to the company. For VC-backed growth companies, FCF is typically negative (they're investing aggressively in growth). FCF becomes critically important as companies scale toward profitability — investors evaluate 'free cash flow inflection' as a key milestone. Public software companies are increasingly valued on FCF multiples rather than revenue multiples. Strong FCF generation gives companies flexibility: fund growth internally, return capital to investors, or make acquisitions.
Related Terms
Frequently Asked Questions
How do you calculate Free Cash Flow?
Free Cash Flow is calculated using the formula: FCF = Operating Cash Flow - Capital Expenditures. Cash generated by a business after accounting for capital expenditures — a measure of true financial health and the basis for many valuation models.
What is a good Free Cash Flow?
What constitutes a "good" Free Cash Flow depends on context — the fund's stage, vintage year, and strategy. Check our benchmarks and calculators for specific ranges.