Free cash flow
Free cash flow is the cash flow available to all providers of capital for a venture, after paying for its operating expenses and the fixed and working capital investments.
Free cash flow lets us value a venture or a company. It is often used in conjunction with a discount rate to arrive at an overall cash flow and estimate the intrinsic value of an equity share in the venture.
Free cash flows can be of two types:-
- Free cash flow for the firm — It is the free cash flow which is available to all the providers of capital for the venture. We get the amount by subtracting fixed investments from cash flow from operations
- Free cash flow for equity — It is the free cash flow which is available to the equity providers, who have a share in the venture in lieu of the cash provided. We get the amount by subtracting fixed investments and payment to debt holders from cash flow from operations.