Free Cash Flow
IntermediateFree cash flow is the cash a business generates from its operations after paying for the capital investments needed to maintain and grow it. It is the cash available to repay debt, pay dividends or reinvest.
Profit includes non-cash items and ignores spending on equipment and buildings. Free cash flow focuses on actual cash. It is usually calculated as operating cash flow minus capital expenditure.
For example, a company that generates 12 million of cash from its operations and spends 4 million on new equipment and maintenance has free cash flow of 8 million.
Free cash flow is valued because it shows how much money the business truly has available after keeping itself running. Companies with strong free cash flow can pay dividends, buy back shares, reduce debt or make acquisitions without needing to borrow. A company that reports profits but consistently has negative free cash flow may be relying on outside funding to survive.
There are several versions. Free cash flow to the firm looks at cash available to all funders, both lenders and shareholders. Free cash flow to equity looks at what is left for shareholders after debt payments. When reading free cash flow figures, it is worth checking which definition is being used.
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