Understanding Free Cash Flow & why does it matter.
It’s necessary for managing debt, planning growth capital expenditure (CapEx), deciding on capital distribution, ensuring the long-term survival of a business and so much more.
Wondering what it is and why it matters?
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What is Free Cash Flow (FCF)?
The cash left over after a company pays for its everyday operating expenses and capital expenditures (CapEx).
The company can use these funds however it wants.
Types of Free Cash Flow
1️⃣ FCFE - Free Cash Flow to Equity
Calculates the cash available to be returned to equity shareholders, either in the form of dividends or as cash buybacks, after all expenses, reinvestment, and debt payments.
📌 It is a measure of equity capital usage.
2️⃣ FCFF - Free Cash Flow to Firm
Calculates the cash available to all stakeholders (both debt and equity holders), after covering depreciation expenses, taxes, working capital and investments.
📌 Important for evaluating the ability of a company to pay off debt and distribute dividends.
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How to calculate?
FCF = Operating cash – Capital expenditure
FCFE = Cash Flow generated from Operating Activities – Capital Expenditure
FCFF = Net Income + Non-cash charges + [Interest x (1-Tax Rate)] -
Why is FCF important and what does it tell you?
- Shows how efficient a company is at generating cash.
- Investors use it to measure whether a company might have enough cash for dividends or share buybacks.
- It tells you how much money it has left after paying the costs to run its business.
It has given 3-yr annualized returns of 31.65%, against 17.29% provided by the benchmark. It gave 5-yr annualized returns of 19.26% against 9.05% provided by the benchmark.
It has AUM of ₹7617 Cr & does not have a lock-in period.
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2. IDFC Tax Advantage (ELSS) Direct Plan-Growth
It has given 3-yr annualized returns of 22.5%, against 15.3% provided by benchmark. It gave 5-yr annualized returns of 12.9% against 11.7% provided by benchmark.
It has an AUM of ₹4033 Cr & has a lock-in period of 3 yrs.