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Free cash flow (FCF) is the cash a business generates after accounting for capital expenditures. It's the truest measure of a company's ability to generate cash — more reliable than earnings (which can be distorted by accounting choices) and more actionable than revenue growth alone.
The formula
FCF = Operating Cash Flow − Capital Expenditures
A company with $500k OCF and $80k capex generates $420k FCF.
Why FCF matters more than EBITDA
EBITDA adds back non-cash charges to normalize earnings across capital structures. FCF goes further: it accounts for capital reinvestment required to sustain the business. A company spending heavily on equipment might have strong EBITDA but negative FCF — it's not actually retaining cash.
For SaaS companies, the gap between EBITDA and FCF is usually small (capex is minimal). For hardware, manufacturing, or infrastructure businesses, capex can consume 30–50% of operating cash flow, making FCF very different from EBITDA.
FCF margin benchmarks
| Company type | FCF Margin |
|---|---|
| Top-tier SaaS (Shopify, Veeva) | 20–30% |
| Typical profitable SaaS | 10–20% |
| Early-stage / growth SaaS | 0–10% |
| High-capex businesses | -10–+5% |
FCF yield for valuation
FCF yield = FCF / Market Cap × 100
A 5% FCF yield means you're paying 20× FCF. A 2% yield means 50× FCF. Generally: FCF yields above 4–5% are considered cheap; below 1.5% is expensive. Adjust for growth expectations — high-growth companies justify lower yields.
FCF vs free cash flow to equity (FCFE)
FCF is firm-level cash generation before debt service. FCFE subtracts debt payments: FCFE = FCF − (Debt Repayment − New Debt). For equity investors valuing a leveraged company, FCFE is more relevant.
Frequently asked questions
What does this calculator do? Calculate free cash flow from operating cash flow and capex, plus FCF margin and optional FCF yield for valuation context.