Free cash flow (FCF) is a financial metric that measures the amount of cash a company generates from its operations after accounting for capital expenditures and working capital. It represents the cash that is available to the company for use in investments, debt reduction, dividend payments, or other purposes.

The formula for calculating FCF is: FCF = Operating Cash Flow - Capital Expenditures

Where:

• Operating Cash Flow is the cash generated from a company's operations, such as sales and expenses, and is calculated by adding back non-cash expenses to net income.
• Capital Expenditures is the amount of money a company spends on long-term investments in property, plant, and equipment (PP&E) or other capital assets.

Free cash flow is a valuable metric for investors and analysts because it provides insight into a company's financial health and ability to generate cash. A positive FCF indicates that a company is generating more cash than it is spending on capital expenditures and is, therefore, in a position to invest in growth opportunities, pay down debt, or return cash to shareholders through dividends or share buybacks. Conversely, a negative FCF may indicate that a company is spending more cash than it is generating, which could raise concerns about its ability to meet its financial obligations or invest in future growth.

Free cash flow is also used in valuation models, such as discounted cash flow (DCF) analysis, to estimate the intrinsic value of a company's stock based on its expected future cash flows.

Example:

Nvidia reported the following financial data:

• Operating cash flow: $6.62 billion
• Capital expenditures: $1.47 billion

Using the formula for calculating FCF: FCF = Operating Cash Flow - Capital Expenditures FCF = $6.62 billion - $1.47 billion FCF = $5.15 billion

This means that in fiscal year 2021, Nvidia generated a free cash flow of $5.15 billion, indicating that the company has strong cash generation capabilities and could potentially invest in growth opportunities, pay down debt, or return cash to shareholders through dividends or share buybacks.

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