Free Cash Flow

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What It Means

Free Cash Flow is a measure of how much cash a company generates through operations. It excludes non-cash expenses, such as depreciation and amortization, but it includes investments in capital equipment and changes in Net Working Capital (i.e. other uses of cash that do not flow through the company’s income statement).

Starting with a company’s operating profit, also known as EBIT, Free Cash Flow over any period of time can be calculated as follows:

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Why It’s Important

The Enterprise Valuation of most businesses is largely dependent on their ability to generate cash, as Buyers look towards a company’s expected cash flows to pay down debt and invest in new projects after an Acquisition.

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