Financial Glossary
Free Cash Flow (FCF)
Free Cash Flow (FCF) is the cash a business generates from operations after funding the capital expenditures needed to maintain or grow its asset base. Formula: FCF = Operating Cash Flow - Capital Expenditures (CapEx). Unlike net income, FCF is not affected by non-cash accounting choices (depreciation schedules, accruals) and reflects actual dollars available to pay down debt, return capital to shareholders, make acquisitions, or build reserves. Unlevered FCF (before debt service) is used in DCF valuations; levered FCF (after interest payments) reflects what equity holders receive. FCF yield (FCF / market cap or equity value) is a valuation metric that compares a company's cash generation to its price.
Problem & Application
Formula: FCF = Operating Cash Flow - CapEx. A campground property generates $340,000 in operating cash flow (net income plus depreciation, adjusted for working capital changes). The owner spends $80,000 on a new utility hookup expansion (maintenance and growth CapEx). FCF = $340,000 - $80,000 = $260,000. This $260,000 is available to make debt principal payments, fund a reserve account, or distribute to the owner. Net income for the same period might show $220,000 -- lower than FCF because the $80,000 CapEx was partially offset by a non-cash depreciation add-back. In years with major infrastructure investment (new bath houses, roads, glamping structures), FCF can turn negative even with positive net income -- a common source of surprise for operators who distribute based on taxable income without monitoring actual cash generation. Lenders and acquirers price campground and STR assets on FCF multiples, making FCF the most important financial metric for sale-readiness preparation.
In Short
Free Cash Flow is a crucial metric for evaluating a company's ability to generate surplus capital for reinvestment, debt reduction, or dividends.