Cashflow Ratio

Free Cashflow – Understanding Free Cash Flow

What Is Free Cashflow?

Free Cashflow (FCF) is the amount of cash a company retains from its operating cashflow after deducting all necessary investments in fixed assets (CapEx). It is defined as:

Free Cashflow = Operating Cashflow − Capital Expenditures (CapEx)

With free cashflow, companies can pay dividends, buy back their own shares, or repay debt. Compared to accounting profit, cashflow is much harder to manipulate – which is why Finanzoo weights it especially heavily in the F-Score.

Calculation: Free Cash Flow to the Firm (FCFF)

FCFF = Net income + non-cash components (e.g. depreciation) + interest expense − investments in fixed assets − investments in working capital

FCFF accounts for interest and non-cash components starting from net income or EBIT. Several variants exist that yield different results depending on perspective and purpose.

Significance in the Finanzoo F-Score

Finanzoo relates free cashflow to the current price (P/FCF – Price-to-Free-Cashflow Ratio). With a weight of 22%, the P/FCF is the strongest single component in the Finanzoo F-Score. A negative free cashflow over extended periods leads to point deductions.

Capital Flow and Its Significance

Capital flow refers to the movement of funds between different economic entities. It encompasses all inflows and outflows of money and is an important indicator of economic dynamism. Capital flows occur in various forms:

Direct investments: Investments in subsidiaries or share purchases
Portfolio investments: Investments in stocks or bonds
Loans: Lending of funds for interest
Foreign exchange trading: Buying and selling currencies

Why Is FCF So Important?

Unlike accounting profit, cashflow can hardly be distorted by accounting tricks. It shows how much cash a company actually generates. Growth companies with positive FCF are more financially independent and can invest without capital increases.

Find stocks with positive FCF