how to calculate free cash flow Formula and equation
Free Cash Flow Formula and Equation
The calculation starts with cash flows operating activities, which is a measure of a company’s ability to generate cash from its current operations.
Formula of Free Cash Flow
- Cash flows from operating activities XX
- Less: capital expenditures (X)
- Less: dividend (X)
- Free cash flow X
The cash remain free used by company chooses. Firms subtracted capital expenditures which occur on purchase of fixed assets and dividend which paid to stockholders during the years.
Cash flow Adequacy ratio
Cash flow adequacy ratio compares free cash flow to the average amount of debt maturing in the next five years and measures the ability to pay maturing debts.
Cash flow adequacy ratio = free cash flow / average amount of debt maturing in five years