Metric Explainer: Free Cash Flow (FCF)
FCF is the cash left over after a company has paid for its operations and invested in maintaining/growing its assets. It's the money truly available to share...
Simple definition
FCF is the cash left over after a company has paid for its operations and invested in maintaining/growing its assets. It's the money truly available to shareholders, debt repayment, or reinvestment.
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"FCF = operations ka cash minus capex. Yahi hai asli paisa jo company ke paas bachta hai."
Formula
FCF = Cash from Operations (CFO) - Capital Expenditure (Capex)
Maintenance capex vs growth capex
Ideally, separate maintenance capex (keeping existing assets running) from growth capex (building new capacity). Most companies don't disclose this split — you can approximate: maintenance capex ≈ depreciation, growth capex = total capex - depreciation.
Why it matters
| Use case | How |
|---|---|
| Intrinsic valuation (DCF) | FCF is the input for discounted cash flow models |
| Dividend sustainability | Dividends paid must be ≤ FCF for long-term sustainability |
| Self-funding growth | Positive FCF means no need to raise external capital |
| Debt repayment | FCF funds debt reduction without equity dilution |
FCF Yield — the valuation shortcut
FCF Yield = FCF / (Market Cap) × 100
| FCF Yield | Interpretation |
|---|---|
| > 6% | Potentially undervalued (if sustainable) |
| 4–6% | Fair |
| 2–4% | Fairly priced or growth premium |
| < 2% | Expensive or capital-hungry business |
Sector context
| Sector | Typical FCF Pattern | Why |
|---|---|---|
| IT Services | Strong positive | Low capex, high margins |
| FMCG | Steady positive | Moderate capex, stable cash flows |
| Pharma | Variable | R&D spending creates lumpy capex |
| Manufacturing | Cyclical | Heavy capex cycles followed by harvest periods |
| Telecom | Negative for years | Massive spectrum + tower capex |
| Real Estate | Often negative | Land bank + construction = cash drain |
Red flags
| Signal | Risk |
|---|---|
| FCF negative for 5+ years | Company cannot self-fund, needs constant external capital |
| FCF positive but achieved by slashing capex | Short-term cash gain at cost of long-term competitiveness |
| Acquisitions excluded from "capex" | Some companies show FCF excluding M&A spend — misleading |
| Rising lease obligations | Post-Ind AS 116, some "capex" moved to lease payments outside CFO |
Real example: Asset-light vs asset-heavy
| Metric | TCS (IT) | JSW Steel |
|---|---|---|
| CFO | ₹45,000 Cr | ₹22,000 Cr |
| Capex | ₹5,000 Cr | ₹18,000 Cr |
| FCF | ₹40,000 Cr | ₹4,000 Cr |
| FCF/Revenue | 17% | 2.5% |
TCS converts 17% of revenue to FCF. JSW Steel, despite healthy CFO, retains very little because steel plants need constant capex. This is why IT companies command higher P/E multiples.
Related metrics
- CFO Conversion — FCF starts with CFO; weak CFO means weak FCF
- ROCE — High ROCE + high FCF = quality compounder
- Working Capital Days — WC changes reduce CFO and therefore FCF