Educational material from 
What you will learn
- Calculate free cash flow under an explicitly chosen definition.
- Distinguish capital spending from the entire investing cash flow.
- Reconcile operating, investing and financing flows with ending cash.
Define the measure before selecting components
In our model, free cash flow is operating cash flow minus cash paid during the year for capital expenditure, called capex here. We deduct the gross cash outflow for that expenditure. Asset sales, acquisitions and financing are excluded from this particular definition. All amounts are invented and refer to the same full year in SEK million.
The SEC describes this common calculation but notes that free cash flow has no uniform definition. For a real company, read its reconciliation and adjustments. The source discusses US reporting; we use its explanation of the measure without turning US rules into Swedish reporting requirements.
If the table does not fit, scroll it sideways.
| Component | Cash flow |
|---|---|
| Operating activities | +SEK 150 million |
| Cash paid for capital expenditure, capex | −SEK 90 million |
| Sale of a non-current asset | +SEK 20 million |
| Cash paid for an acquisition | −SEK 40 million |
| New borrowing | +SEK 30 million |
| Loan repayment | −SEK 25 million |
| Dividend paid | −SEK 15 million |
SEK 60 million under the definition, not the whole journal
Defined free cash flow is 150 − 90 = SEK 60 million. We used just two journal components. This correctly answers the chosen measure but does not yet calculate the year’s total cash change. The 20 million asset sale or 30 million loan should not be added merely because they are inflows.
Entire investing cash flow is −90 + 20 − 40 = −SEK 110 million. Operating activities plus all investing activities therefore total 150 − 110 = SEK 40 million. This is a different bounded subtotal from our 60 million. Label each subtotal and list its components so two calculations do not receive the same name.
Reconcile to the year’s ending cash
Financing cash flow is 30 − 25 − 15 = −SEK 10 million. Total cash change is 150 − 110 − 10 = +SEK 30 million. Starting cash of SEK 50 million gives ending cash of 80 million. Every journal component has now been used once in the full reconciliation.
You can also check starting from free cash flow: 60 + 20 − 40 + 30 − 25 − 15 = SEK 30 million. This route reveals the components missing from that measure. Free cash flow of 60 million is therefore neither ending cash of 80 million nor the year’s cash change of 30 million.
A positive measure does not promise a dividend
A loan repayment or another required payment may sit outside the chosen calculation. Concluding that all SEK 60 million can fund any desired dividend therefore does not follow from the measure’s name. Cash availability and future obligations also need investigation. We do not calculate distributable amounts or what someone should invest in.
Investiq’s company guide helps identify your supporting material. Then use report cash-flow lines for your own reconciliation, checking the same year, currency and definition. This lesson promises no automatic capex or cash-flow analysis in the app. Continue with cash flow versus profit to connect the journal to the income statement.
Try it yourself
A separate company has starting cash of SEK 25 million, operating cash flow +80, paid capex −100, an asset sale +15 and new borrowing +40 million. No other flows exist. Calculate free cash flow under the same definition, total cash change and ending cash.
Show the solution and explanation
Free cash flow is −SEK 20 million. Cash change is +SEK 35 million and ending cash SEK 60 million.
80 − 100 = −20. The complete journal gives 80 − 100 + 15 + 40 = 35; 25 + 35 = 60. Negative free cash flow can therefore coincide with increased cash when other inflows exist.
Check your understanding
Is the entire investing cash flow the same as capex?
No. The journal also includes an asset sale and acquisition; capex is the stated capital-spending outflow of SEK 90 million.
Can companies’ free cash flows always be compared using only the heading?
No. Read the calculation and reconciliation first because definitions and adjustments can differ.
Practise with virtual money
Try what you just learned in a practice portfolio with virtual money. You don't deposit any real money.
How the practice portfolio worksKeep learning and practising
More lessons on this topic
Analyse company finances
Sources and examples
- SEC: free cash flow definition and limitations, question 102.07
- SEC: income statements, balance sheets, cash flows and inventory turnover
The sources support the factual explanations. Calculations and exercises were created for this lesson. Amounts and price changes are invented unless stated otherwise.
This material is educational and does not recommend securities to buy. A simulated result does not guarantee a future result.
