Here’s a quick comparison of Free Cash Flow for Best Buy (a U.S.-based retailer) and Zendesk (a U.S.-based software company):įor Best Buy, the interpretation is as follows:įCF is positive and growing, which is good, and the company doesn’t seem to be “playing games” by artificially cutting CapEx or changing its Working Capital to boost its FCF. How to Calculate Free Cash Flow: Comparison for Best Buy and Zendesk GAAP.īecause of the changes to lease accounting made in 2019, however, the calculation is often more complex for non-U.S. “How to calculate Free Cash Flow” seems like a very simple topic/formula – and it mostly is that simple under U.S. The company still pays the full Lease Expense in cash splitting it into Interest and Depreciation elements does not change that.Īlso, if CFO includes many items in the Non-Cash Adjustments section besides D&A and Deferred Taxes, you may want to remove them to standardize the formula. So, if the company you’re analyzing has a CFO section that does not do that, you will need to adjust it for comparability purposes.įor example, under IFRS, you should remove the Lease Depreciation add-back in CFO because it’s not a true “non-cash expense.” One important note – especially under IFRS – is that this definition assumes that Cash Flow from Operations deducts Net Interest Expense, Preferred Dividends, Taxes, and all Lease Expenses. How to Calculate Free Cash Flow Under IFRS and Other Accounting Systems But almost every line item within Investing and Financing Activities is “optional,” except for Capital Expenditures.ĬapEx is a required item because companies need buildings, factories, and equipment to house employees, manufacture products, and sell them to customers.Įven companies that sell services or software need buildings and computer equipment, and spending on both of them is considered CapEx.įree Cash Flow lets us quickly and easily assess a company’s ability to generate cash flow from its business, including the cost of servicing its Debt and other long-term funding.Everything in a company’s “Operating Activities” section is required for its business – earning Net Income, paying for Inventory, collecting Receivables, etc.There are other variations of Free Cash Flow, which we explore later in this course and the other written guides.īut this initial definition is a good one because: Free Cash Flow = Cash Flow from Operations (CFO) – Capital Expenditures (CapEx).We can define this metric in different ways, but a simple one is Free Cash Flow: “Discretionary cash flow” means “cash flow after the company pays for what it needs to run its business and avoid being shut down by external parties such as lenders and the government.” To estimate the company’s discretionary cash flow, therefore, we need a more precise definition. The problem is that companies can spend and receive their cash in many different ways, and not all these methods are “required” and “recurring.”įor example, if a company issues Debt or Equity, both activities boost its cash flow – but neither one is necessarily “required” for the business to keep operating.Ī company could spend cash buying Financial Investments, issuing Dividends, or repurchasing shares, but all those activities are also “optional.” If you have the three financial statements, including the Cash Flow Statement, it should be easy to determine a company’s “Cash Flow”: just take the “Net Change in Cash” from the bottom of the Cash Flow Statement, right? How to Calculate Free Cash Flow and What It Means
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