What is Free Cash Flow?
Free cash flow (FCF) is the cash a company generates from its operating activities after deducting capital expenditure required to maintain or expand its asset base. It is a key indicator of financial flexibility, representing cash available to pay dividends, repurchase shares, repay debt, or invest in growth.
How It Works
- Start with cash from operating activities (from the cash flow statement).
- Subtract capital expenditure (CapEx) on property, plant, and equipment.
- Result is Free Cash Flow to the Firm (FCFF) or simply FCF.
- Free Cash Flow to Equity (FCFE) further deducts net debt repayments.
- Use FCF in discounted cash flow (DCF) valuation and to assess dividend sustainability.
Saudi Context
Tadawul-listed companies disclose CapEx and operating cash flow in IFRS-compliant cash flow statements, making FCF computable for every reporting period. Saudi dividend-paying blue chips (STC, Saudi Aramco, Al Rajhi Bank) target high and stable FCF to fund both dividends and Vision 2030 investment programs.
Example
A petrochemical company reports operating cash flow of SAR 4.2 billion and CapEx of SAR 1.8 billion for the year. Free cash flow = 4.2 – 1.8 = SAR 2.4 billion. Management uses it to fund a SAR 1.5 billion dividend and SAR 0.9 billion of debt repayment.