free cash flow definition
free cash flow means free cash, which is the remaining profits of the operating cash flow activities in the public trade company .when after subtracting the; certain things. if you ask what is mean certain things?
let’s say if any of the industry has an income of ten thousand dollars every year. which we take as operating activities’ cash flow. then, to find the free cash flow; you want to subtract that by property, plants, and equipment, was that also called capital expenditure (or) capex, etc…
that’s where you find the free cash flow. if you want to completely understand the free cash flow and how it works and calculated, then let’s begin ;
so we will take a look at how to calculate the free cash flow of a particular company. however, to make you more clearly understand the; free cash flow. don’t confuse it, because some people call the free cash flow owner earning. the free cash flow and owner earnings are the same thing but free cash flow and cash flow are not the same things.
cash flow means; which is, cash incoming and outgoing in a certain company is called cash flow. free cash flow is; which is calculated through the cash flow statement by subtracting the operating cash flow activities and capital expenditure.
example for free cash flow
let’s say you stock investor and you want to calculate the free cash flow for this current year and also wanna calculate the free cash flow for the next ten years. then, how did you calculate the free cash flow?
the formula for calculating the free cashflow is operating cash flow minus plant, property, and equipment again time am noting you; this operating cash flow activity is always referred to through the cash flow statement.
if you don’t know what is cash flow statement; then don’t hesitate, feel free to check out the cash flow statement article before learning the free cash flow. otherwise, you may find it hard to understand this. when comes to calculating the free cash flow.
calculation
let’s take the operating cash flow of the Apple industry is 3,098 million dollars This is not a real operating cash flow in the current year; for Apple organization. I just giving you the sample numbers to calculate the free cash flow here.
And the property, plant, and equipment, which is -1,349 million dollars. some statements mentioned this as capital expenditure, capex, etc… so don’t confuse it, I remind you again.
so if you subtract the operating cash flow of 3,098 million dollars from the 1,349 million dollars. then you will get the answer of 1,749 million dollars. which is the free cash flow for the Apple company this year.
furthermore when you want to know about free cash flow for next year. just select the past ten years’ average growth of the particular industry. then continuously add them together. let’s say; in the past ten years years average free cash flow growth rate is 7%.
and the current year’s free cash flow is 100 dollars. if you plus the 100 by the 7% then you will get 107 dollars. then, 2 years plus 107 by 7%, you will get the answer of 114.49 dollars. then if you want to find the free-cash flow for the third year then plus the 7% by 114.49 dollars. you will get the answer of 122.5043 dollars. and do that continuously for ten years.
if you didn’t get the right answer, don’t confuse yourself. because it works in a compound interest way. so just use the calculator to find the correct and accurate answer. and also I recommend books on cash flow; for those who want to master it. if you have any more doubt about it, then don’t hesitate to feel free to contact us.
Corporate Valuation Using the Free Cash Flow Method Applied to Coca-Cola
