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Free cash flow to operating cash flow ratio definition

Description

Free cash flow (FCF) to operating cash flow (OCF) ratio compares two kinds of cash flows (free and operating). Free cash flow is calculated by deducting capital expenditure from OCF. Data needed to calculate this ratio is collected from cash flow statement.

Capital expenditure (CAPEX) can be described as main expenses to keep up company's competitive shape. As CAPEX is not included in free cash flow, it shows the money that can be used for other purposes. Company’s investors, owners and also creditors have their own reasons to be interested in this fact.

Norms and limitations

Higher value of free cash flow to operating cash flow indicates a better financial strength.

It is recommended to compare this ratio to those of the companies, working within the same industry.

Formula

Operating cash flow (OCF, cash flow from operations) is the money that a company earns from its’ core business.

Free cash flow is calculated by deducting capital expenditure from OCF. Capital expenditures or CAPEX are the  expenses, paid for purchased capital asset or for made investments.