Free cash flow (FCF) is the cash generated by a company's operations after funding capital expenditures and working capital changes — available for distribution to capital providers or reinvestment in growth. It is the central metric in DCF valuation, existing in two forms: FCFF (Free Cash Flow to Firm — for all capital providers) discounted at WACC to yield enterprise value, and FCFE (Free Cash Flow to Equity — for shareholders only) discounted at cost of equity. The gap between reported EBITDA and FCF — driven by capex, working capital and tax — is a critical earnings quality indicator in due diligence.

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Example: a Swiss SME presents EBITDA of CHF 3.0 million, depreciation CHF 600,000, capex CHF 800,000 and working capital increase CHF 200,000. FCF = EBITDA × (1-14%) + depreciation × 14% - capex - ΔWCR = 2.58 + 0.084 - 0.8 - 0.2 = CHF 1.664 million. The CHF 1.336 million gap between EBITDA and FCF reflects the true cash conversion quality of the business — essential information beyond reported accounting earnings.

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Hectelion constructs rigorous FCF models — normalising capex, working capital and effective tax rate — as the foundation of every DCF valuation engagement.