Definitions 
Free Cash Flow(FCF) is a measurement of the money generated by a company after tax and capital expenditure deductions.
Contrary to the EBITDA ratio, it provides an indication of how much excess cash has been generated by a firm after removal of fixed assets expenses.
Free Cash Flow: The formula
FCF = operating cash flow - capital expenditures - tax
Free Cash Flow: An example
Let’s assume that XXX Plc in 2005 generated £100 million cash and incurred in £30 million costs for fixed assets. The £70 million remaining were subject to corporation tax, say £20 million. Then, its FCF was £50 million.
The following year, the company generated £110 million, but this time the capital expenditures were £45 million, and a corporation tax of £25 million was paid, leaving a FCF of £40 million.
In this example, XXX Plc reduced its profitability because despite an operating cash flow increase of 10%, the capital expenditure shot up by 50%, consequently reducing the FCF by 20% when compared to 2005.
In these cases, shareholders become more concerned in the company ability to reward the invested capital in the form of dividends. However, the capital expenditure not only includes fixed assets costs, but also accounts for investments to create future value.
