Free Cash FlowFCF
Free cash flow is the cash a company generates from operations after paying for capital expenditure. It is the money available for dividends, buybacks, debt repayment or acquisitions. Definitions vary slightly between analysts.
Profits can be shaped by accounting choices; cash is harder to fake. Free cash flow shows how much cash a business produces after keeping its assets running and growing. It is what ultimately pays for dividends, buybacks and debt repayment.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- FCF, Owner earnings (similar)
- Updated
Free cash flow in plain words
In its simplest form, free cash flow is the cash a business generates from operations minus what it spends on capital investment.1
Companies usually calculate it from operating cash flow in the cash flow statement, minus capital expenditures.2
It has no uniform definition, so always check how a company calculates it.2 See Fundamental Analysis.
How to calculate free cash flow, step by step
Find operating cash flow
Take cash flows from operating activities from the cash flow statement.2
Find capital expenditure
Take spending on property, plant and equipment from the investing section.
Subtract
Free cash flow is cash from operations minus capital expenditures.1
Check the company's definition
Because FCF has no uniform definition, read how the company calculates it.2
Know the variants
FCF can mean different metrics, such as free cash flow to the firm or to equity.1
Use it carefully
Use FCF to value the business and to check whether it can keep up with its debt payments.1
Worked examples
Example 1 — Basic FCF
FCF $75mA company has operating cash flow of $120m and capex of $45m.
| Operating cash flow | $120m |
| Minus capex | −$45m |
| Free cash flow | $75m |
In its most generic form, FCF is cash from operations minus capital expenditures.1
Example 2 — Where it goes
$25m leftThe same company pays $30m in dividends and spends $20m on buybacks.
| FCF | $75m |
| Dividends + buybacks | −$50m |
| Left over | $25m |
FCF shows the cash a company can potentially distribute after reinvesting in the business.1
Example 3 — Negative FCF
FCF −$30mA fast-growing company has operating cash flow of $50m and capex of $80m.
| Operating cash flow | $50m |
| Minus capex | −$80m |
| Free cash flow | −$30m |
With FCF defined as operating cash flow less capex, heavy investment can push it below zero.2
Free cash flow vs related measures
| Aspect | What it shows | Main weakness |
|---|---|---|
| Net income | Accounting profit | Includes non-cash items |
| EBITDA | Operating profit before D&A | Ignores capex |
| Operating cash flow | Cash from operations | Ignores capex |
| Free cash flow | Cash after capex | Definitions vary |
Where free cash flow is used
Valuation
Discounted cash flow models value a company from its future FCF.
Dividend safety
Checks whether dividends are covered by cash.
Debt capacity
Shows whether a company can service its debt — see Default Risk.
Quality of earnings
Compares cash generated with reported Earnings.
Advantages and disadvantages
Advantages
- Based on cash, harder to flatter than profit.
- Counts the cost of capital spending.
- Links directly to dividends, buybacks and debt repayment.
Disadvantages
- No uniform definition across companies.
- Lumpy capex makes it jump from year to year.
- Negative FCF can be fine for a growing business.
- Does not show mandatory payments such as debt service.
Going deeper
Read as far as you need. Each level builds on the one before it.
Common mistakes
Comparing different definitions
Mixing company-defined FCF figures without checking.
Judging on one year
Ignoring that capex can be lumpy.
Treating it as spare cash
Forgetting debt repayments and other required payments.
Penalising all negative FCF
Not separating growth investment from weak operations.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- FCF = operating cash flow − capital expenditure (generic form).
- It funds dividends, buybacks, debt repayment and acquisitions.
- Definitions vary, so check the calculation.
- Negative FCF is not always bad for a growing company.
- It is not all truly 'free' — required payments may remain.
Frequently asked questions
Is free cash flow a GAAP number?
What is free cash flow yield?
Can FCF be manipulated?
Further learning
- Earnings
Profit compared with cash generated.
- Dividend
One main use of free cash flow.
- Payout Ratio
How much of profit or cash is paid out.
- Default Risk
Cash flow and the ability to repay debt.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Free Cash Flow (FCF) (opens in a new tab) Checked .
- U.S. SEC (Division of Corporation Finance). Non-GAAP Financial Measures (interpretations) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.