Free cash flow Ratio : Meaning, Formula and Example

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The free cash flow shows the cash flow available for distribution after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations. Net investment in operating capital is calculated by subtracting the previous year’s total net operating capital from the current year’s total net operating capital.

Formula for Free cash flow Ratio

Free cash flow = Net operating profit after taxes-Net investment in operating capital

Example

Wipro has Net operating profit after taxes of Rs.10,980 and capital expenditure of Rs.5,250. This gives a free cash flow of Rs.5760.

This means that Wipro could distribute Rs.5760 to its shareholders without affecting their working capital requirement.