Free Cash Flow
Free cash flow (FCF) is the cash a company has left after paying for its operating costs and capital expenditures. It is the money genuinely available to repay debt, pay dividends, buy back shares, or reinvest. It is calculated as operating cash flow minus capital expenditures.
Worked example
A company reports $500 of operating cash flow and spends $150 on equipment and property. Free cash flow = 500 − 150 = $350.
Why it matters
Free cash flow is harder to manipulate than reported earnings and is the input most DCF models discount. A company can show accounting profits while burning cash, so investors watch FCF closely as a reality check.
Frequently asked questions
Is free cash flow better than net income?
They answer different questions. Net income follows accounting rules; free cash flow tracks actual cash. Many investors trust FCF more for valuation because it reflects what the business can really return to owners.
Related terms: Discounted Cash Flow (DCF), Operating Cash Flow, Capital Expenditure (CapEx)