Definition
Free cash flow represents the cash a business truly generates after maintaining and expanding its asset base. It is often considered more reliable than earnings because it is harder to manipulate through accounting choices. Positive and growing FCF indicates a company can fund dividends, buybacks, acquisitions, or debt reduction without external financing.
functions Formula
FCF = Operating Cash Flow − Capital Expenditures
lightbulb Example
A company generates $50M in operating cash flow and spends $20M on capital expenditures. FCF = $30M. This cash can be returned to shareholders via dividends ($10M) and buybacks ($15M), with $5M retained.
Pro Tip
Persistent divergence between rising earnings and falling FCF is a red flag for earnings quality.
verified_user Key Points
- More reliable than earnings as it measures actual cash
- Growing FCF often precedes stock price appreciation
- Negative FCF in growth phase can be acceptable
- FCF yield = FCF / Market Cap, useful for valuation