Free Cash Flow Explained

Free cash flow (FCF) is the cash a business generates from operations after spending what it needs to maintain and grow its asset base. In simple terms: operating cash flow minus capex. It’s the cash truly available to reward investors or strengthen the company.

Why FCF is so valued

Net profit is an accounting figure; FCF is closer to real, spendable money. Strong, consistent FCF means a company can, without borrowing:

• Pay and grow dividends.
• Buy back shares.
• Reduce debt.
• Fund new growth.

It’s also the foundation of DCF valuation, which values a company on its expected future free cash flows.

Reading FCF well

• Positive and growing FCF is a strong sign of business quality.
• Negative FCF isn’t always bad — a young company investing heavily in growth may have negative FCF for years; the question is whether that investment earns good returns.
• Watch the trend and the “why.” FCF that’s positive only because the company slashed necessary capex can be a warning, not a win.

FCF vs EBITDA

EBITDA ignores capex; FCF subtracts it — which is why FCF is often the more honest picture for capital-intensive businesses.

FCF answers the practical question: after everything, how much cash is actually left? Education only, not a recommendation.