Free Cash Flow Calculator

What this calculator does

Profit is an opinion in the sense that it depends on accounting choices. Cash is a fact: it either arrived or it did not. This calculator measures the cash a business has left after paying to keep itself running and to maintain and expand what it owns, which is the money genuinely available to pay down debt, fund dividends, buy back shares, or simply pile up.

The core calculation is one subtraction:

Free cash flow = Operating cash flow − Capital expenditures

From there the tool builds four more figures, turning that raw number into something you can compare across companies and against other investments entirely.

Why profit and cash part company

A company can report a healthy profit while its bank balance falls, and it can report a loss while cash builds up. That is not usually trickery. It follows from two specific, nameable differences, and understanding them is what makes free cash flow worth calculating.

The first is depreciation. When a business buys a machine, the profit statement does not take the hit at once. Instead it spreads the cost across the machine's life as a depreciation charge. That charge reduces profit every year even though no money leaves the building in those years. So profit is understated relative to cash to the extent of depreciation.

The second is capital expenditure, and it runs the other way. The cash for that machine went out of the door on the day it was bought, in full, but it never appears as a cost in the profit statement at all. So a company spending heavily on new plant can look profitable while haemorrhaging cash.

Free cash flow settles the argument by starting from operating cash flow, which already has depreciation added back, and then subtracting what was actually spent on assets. It counts money when it moves. That is why it is harder to flatter than earnings, and why a company whose profits are rising while free cash flow falls is worth a much closer look.

The five figures, and one sign to watch

1. Operating cash flow. From the cash flow statement, the cash generated by the business itself.
2. Capital expenditures. Spending on property, plant and equipment. Look for a line named something like "purchase of property, plant and equipment".
3. Shares outstanding. Used for the per-share figure and the market capitalisation.
4. Stock price. The current share price.
5. Revenue. Total sales for the same period, used for the margin.

The sign on capex is the trap. On a cash flow statement, capital spending is usually shown as a negative number, because it is money leaving. This calculator subtracts what you enter, so it wants the amount as a positive figure. Enter it as it appears on the statement, with the minus sign, and you will be subtracting a negative, which adds the money back instead. In the example below that mistake turns a free cash flow of 3.5 million into 6.5 million, nearly double, and it turns a cash-consuming year into an apparently splendid one. Type the amount, not the sign.

Keep every figure to the same period too. Annual cash flow against annual revenue, or quarterly against quarterly. Mixing a quarter's cash flow with a year's revenue produces a margin that means nothing.

A company through all five outputs

Take a business with operating cash flow of $5,000,000, capital expenditure of $1,500,000, one million shares outstanding at $60 each, and revenue of $20,000,000.

• Free cash flow: 5,000,000 − 1,500,000 = $3,500,000
• Free cash flow per share: 3,500,000 ÷ 1,000,000 = $3.50
• Market capitalisation: 1,000,000 × 60 = $60,000,000
• Free cash flow yield: 3,500,000 ÷ 60,000,000 = 5.83 percent
• Free cash flow margin: 3,500,000 ÷ 20,000,000 = 17.50 percent

Two of those are worth pausing on. The margin says that 17.5 paisa of every rupee of sales survives all the way through to free cash, which is a measure of how efficiently the business converts revenue into money you could actually take out. And the yield says something rather different, which the next section is about.

Free cash flow yield puts a share next to a bond

The yield is the most useful number this tool produces, because it converts a company into a form you can hold against completely different investments.

A yield of 5.83 percent means that if the business handed you every rupee of its free cash each year, and you paid today's market price for it, you would be collecting 5.83 percent a year on your money. That is deliberately the same shape as a bond yield or a deposit rate, and it is meant to be compared with them. If high-grade bonds are paying 8 percent, a company yielding 5.83 percent is asking you to accept less current cash in exchange for the possibility of growth. If bonds pay 3 percent, the same company looks generous.

This is also why the yield is the right way round to think about expensive shares. Price sits in the denominator, so as a share price rises the free cash flow yield falls, exactly as a bond's yield falls when its price rises. Paying more for the same cash stream lowers your return, and the yield states that plainly in a way a share price never does.

A negative yield is worth treating seriously. It means capital spending swallowed everything operations produced and more, so the business consumed cash over the period. For a young company building out, that can be entirely reasonable. For a mature one, it is a warning.

One reason two sources will quote you different numbers

Worth knowing so you are not confused when your figure disagrees with someone else's. Free cash flow is not defined by any accounting standard. It is a widely used measure rather than a regulated one, which means people compute it differently and all of them are entitled to.

This calculator uses the most common definition, operating cash flow minus capital expenditure. Other perfectly respectable definitions also subtract dividends paid, or treat changes in working capital separately, or start from earnings before interest and tax and build up. Some analysts distinguish free cash flow to the firm from free cash flow to equity, which differ in how they handle debt.

None of this makes the number useless. It makes it important to know which definition you are looking at, especially when comparing one company against another using figures from different sources. Compute both the same way, from the same statements, and the comparison holds.

Questions people ask

Should I enter capital expenditure as a negative number?

No. Enter it as a positive amount. The calculator subtracts it, so a minus sign would add the spending back and substantially overstate your free cash flow.

Why not just look at profit?

Because profit includes depreciation, a cost with no cash attached, and excludes capital spending, a cash outflow with no cost attached. Free cash flow tracks money as it moves, which is harder to present favourably.

What is a good free cash flow yield?

It depends on what else is available. Compare it against bond yields and against similar companies. A yield well above prevailing bond yields is worth investigating, though it can also signal that the market expects the cash to shrink.

Is negative free cash flow always bad?

Not always. A company investing heavily to grow may consume cash for years by design. It is a concern when a mature business does it, or when it persists without the promised growth arriving.

References

Free cash flow is calculated as cash flow from operations less capital expenditures, and free cash flow yield expresses that figure against the company's market value, giving a percentage that can be set alongside the yields available on other investments such as bonds. Note that free cash flow is not a standardised accounting measure, so definitions differ between sources.

1. Corporate Finance Institute, Free Cash Flow Yield. https://corporatefinanceinstitute.com/resources/valuation/free-cash-flow-yield/
2. AccountingTools, Free cash flow yield definition. https://www.accountingtools.com/articles/free-cash-flow-yield