What is an important factor when projecting Free Cash Flow (FCF)?

When projecting Free Cash Flow (FCF), one of the most important factors to consider is operating expenses. FCF represents the cash generated from operations after deducting capital expenditures, and operating expenses play a crucial role in determining the net operating profit.

The calculation of FCF starts with operating income, from which operating expenses and taxes are subtracted. High operating expenses can significantly reduce the cash available for distribution to investors and reinvestment in the company. Therefore, accurately forecasting operating expenses is vital for a realistic FCF projection, as it impacts the overall profitability and cash-generating ability of the business.

While revenue growth rates is also a critical component in projecting FCF—since higher revenues can lead to increased cash flow—the operating expenses directly affect operational efficiency and profitability, making them fundamentally essential in the FCF calculation. Other factors, such as market share and stock prices, might provide context or influence a business's prospects, but they are not direct components of FCF calculations like operating expenses are.