Free Cash Flow
Free cash flow is the cash a company generates from operations after paying for capital expenditures needed to maintain and grow its business.
Free cash flow, often shortened to FCF, shows how much cash a business produces that it could actually use for other purposes, such as paying dividends, buying back shares, paying down debt or making acquisitions. The usual formula is operating cash flow minus capital expenditures.
Many investors consider free cash flow harder to manipulate than accounting earnings, because it tracks real cash coming in and going out. A company can report a profit but still burn cash, for example if customers pay slowly or heavy investment is needed.
Example: a company generates $600 million in cash from operations and spends $200 million on new equipment and facilities. Its free cash flow is $400 million.
Free cash flow can be negative for healthy, fast-growing companies that are investing heavily, so the context matters. Analysts also compare it with market capitalization to get the free cash flow yield, and use projected free cash flows in discounted cash flow models to estimate intrinsic value.
Definitions vary slightly between sources, for example in how leases or stock-based compensation are treated, so figures from different providers may not match.