Free cash flow (FCF)

Definition

Free cash flow (FCF) represents the amount of cash generated by a business that is available for distribution to its security holders after accounting for capital expenditures. It indicates the financial health and efficiency of a company in generating cash through operations while maintaining and expanding its asset base.

5 Must Know Facts For Your Next Test

1. FCF is calculated as operating cash flow minus capital expenditures.
2. A positive FCF indicates that a company can reinvest in its business, pay dividends, or reduce debt.
3. Negative FCF may suggest that a company is investing heavily in its growth or struggling to generate sufficient cash from operations.
4. Investors closely monitor FCF as it provides insight into a company's ability to generate surplus cash and reward shareholders.
5. FCF differs from net income as it excludes non-cash expenses such as depreciation and amortization.

Review Questions

• How do you calculate free cash flow?
• What does a positive free cash flow imply about a company's financial health?
• Why might investors prefer analyzing FCF over net income?

Related terms

Operating Cash Flow:

Cash generated from regular business operations.

Capital Expenditures:

Funds used by a company to acquire, upgrade, or maintain physical assets.

Net Income:

The total profit of a company after all expenses have been deducted from revenues.