What is free cash flow?
In one line: Free cash flow is the cash a company has left after paying for its operations and its investments in equipment and buildings.
A simple example
Free cash flow (FCF) is a short formula:
FCF = cash from operations − capital spending
- Cash from operations: cash that came in from running the business.
- Capital spending (capex): cash spent on factories, machines, computers and other long-lasting things.
Say in one year a company had:
- Cash from operations: $500 million.
- Capital spending: $150 million.
FCF = $500M − $150M = $350 million.
Both numbers are on the cash flow statement in the company's annual 10-K filing.
Why it matters
FCF is real cash the company can use. It can:
Many investors trust cash more than profit numbers. Net income can include items that aren't cash, like depreciation. FCF shows whether money actually arrived.
Divide FCF by the number of shares to get FCF per share. Some investors compare that with the share price, much like the P/E ratio.
A common mistake
Judging a company on one year of FCF. FCF can swing a lot. A company might spend heavily on a new factory one year, so FCF looks weak, then FCF jumps once the factory runs. Look at several years together.
Negative FCF isn't always bad. Young, fast-growing companies often spend more than they bring in on purpose. The question is whether that spending is building something that will produce cash later.
Questions
Is free cash flow the same as profit?
No. Profit (net income) follows accounting rules and includes non-cash items. FCF tracks the actual cash in and out.
Where do I find free cash flow?
Take "net cash from operating activities" and subtract "capital expenditures" from the cash flow statement. Many finance sites also show it.
What is a good free cash flow?
Positive and steady or growing over several years is what many investors look for. Compare with similar companies.
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