Free Cash Flow (FCF) is the cash remaining after a business covers its operating expenses and capital expenditures. It's what's available for growth investment, debt repayment, dividends, or building cash reserves.
Free Cash Flow = Operating Cash Flow − Capital Expenditures
Why FCF is the gold standard for valuation
Most serious business valuation models use Discounted Free Cash Flow (DCF). Acquirers and PE firms value businesses at a multiple of FCF rather than revenue or EBITDA because FCF represents real, distributable money.
A business valued at 15× FCF generating $500k/year FCF has a $7.5M enterprise value.
FCF yield — the investor's shortcut
FCF Yield = FCF / Enterprise Value
A 5% FCF yield means you'd earn 5% of the purchase price annually in free cash. That's roughly equivalent to a 20× FCF multiple. Most buyers target 5–10% FCF yield as a minimum return requirement.
What CapEx to include
CapEx includes: - Equipment purchases - Office buildout and leasehold improvements - Capitalized software development (for B2B SaaS, this can be significant) - Vehicle fleet and machinery
CapEx does NOT include: - Maintenance repairs (expensed, not capitalized) - Software subscription costs (operating expense) - R&D salaries (operating expense)
FCF margin as a growth benchmark
FCF Margin = FCF / Revenue
For SaaS companies, FCF margin matters as much as revenue growth. The combined metric (growth rate + FCF margin) is increasingly used as a Rule of 40 variant.
Use the Operating Cash Flow Calculator to calculate your OCF and FCF from your income statement figures.