Free cash flow (FCF) is a measure of a company’s financial performance. It represents the cash that a company is able to generate after spending necessary funds to maintain or grow its asset base. FCF is an important measure because it helps show the amount available to a company to pursue business enhancing opportunities. It is calculated as:FCF = EBIT x (1 – tax rate) + depreciation + amortization – (change in net working capital) – (capital expenditure). Assume a company has a $250,000 EBIT and has $50,000 in capital expenditures. Changes in net working capital were $30,000. Depreciation is $20,000 and amortization is $10,000. The current tax rate of the company is 30%. The FCF is:FCF = $250,000 x 70% + $20,000 + $10,000 – $30,000 – $50,000 = $125,000
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