Term · Cash Flow & Working Capital
Free Cash Flow
In briefFree cash flow denotes the cash flow remaining after ongoing operations and investments, but it is not uniformly defined. For small caps it shows financing headroom and dilution risk, which is why the definition used must be stated.
Definition
Free cash flow is an analytical metric, not uniformly defined, for the cash flow remaining after ongoing operations and investments. The definition used must be explicitly stated.
How it is calculated
Formula. Common simplification: operating cash flow − capital expenditures. Depending on the purpose, lease payments, interest, acquisitions, or disposals are treated differently. The metric is not standardized; the issuer's definition and scope are decisive.
Why it matters for small caps
For small caps, profits can differ from the actual cash inflow due to working capital, capitalized costs, or one-off effects. Free cash flow shows financing headroom and dilution risk.
Common misreadings
- FCF, FCFF, and FCFE are often mixed up. A one-off high FCF due to inventory reduction or deferred investments is not automatically sustainable.
In the process
Frequently asked
What is free cash flow?
It is the cash flow that is freely available to capital providers after operations and investments. Because there is no uniform definition, the scope must be disclosed.
How is free cash flow determined?
Frequently, capital expenditures are subtracted from operating cash flow. Depending on the purpose, leases, interest, or acquisitions are treated differently.
What errors occur with free cash flow?
The measures FCF, FCFF, and FCFE are easily mixed up. A one-off high value due to inventory reduction or deferred investments is not necessarily lasting.
Related terms
Sources
Primary
IFRS Foundation – IAS 7 Statement of Cash Flows
https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows.html/
https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows.html/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.