Free cash flow

Free cash flow is the cash a business generates after paying operating costs and capital expenditure, representing the amount available to debt and equity investors; it is the core cash-flow input to a DCF valuation.

ByHoang TruongUpdated June 30, 2026

FrameworkDCF valuation

See it move

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NordRetail S.A. earns €500,000 of operating profit, taxed at 25% to leave €375,000. Adding back the non-cash depreciation charge of €80,000, then subtracting €120,000 of capital expenditure and a €30,000 increase in working capital, leaves €305,000 of free cash flow — the amount actually available to pay lenders and shareholders.

Where it fits

SubjectCorporate FinanceCoreTopicBusiness Valuation & DCFCore

The formula

LaTeX

FCF = EBIT \times (1 - t) + Dep - CapEx - \Delta NWC

Variables

$E B I T$: earnings before interest and tax (operating profit) (€)
$t$: corporate tax rate (decimal)
$D e p r ec ia t i o n$: non-cash depreciation (and amortisation) charge for the period (€)
$C a pE x$: capital expenditure on non-current assets (€)
$Δ N W C$: increase in net working capital (current assets minus current liabilities, excluding cash and short-term debt) (€)

Depreciation is added back because it is a non-cash charge that reduced EBIT; CapEx and increases in NWC represent cash outflows not captured in EBIT.

Check yourself

PracticeCORE

ArborTech plc reports operating profit of €600,000, depreciation of €100,000, capital expenditure of €200,000, and a decrease in net working capital of €40,000 during the period. The corporate tax rate is 25%. What is ArborTech's free cash flow for the period?

Select an answer to check your understanding.