What is free cash flow (FCF)?
Free cash flow is the real cash a business generates after paying to run and maintain itself. Profit can be massaged; cash is harder to fake.
Free cash flow (FCF) is the cash a company has left over after covering its operating expenses and the capital spending needed to maintain and grow its asset base. In short: the actual cash the business throws off and can use to pay dividends, reduce debt, buy back shares, or reinvest.
Investors prize FCF because it’s harder to manipulate than reported profit. Accounting profit involves estimates and judgement calls; cash either arrived or it didn’t. A company that consistently generates strong free cash flow has real financial freedom and resilience.
Watch for the gap between profit and cash. If a company reports rising profits but weak or negative free cash flow year after year, dig into why — it may be tying up cash in receivables or inventory, or spending heavily just to stand still. Persistent strong FCF is one of the clearest signs of business quality.
Formula
Free cash flow = Operating cash flow − Capital expenditure (capex)
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Common questions
Why is free cash flow better than profit?
Profit relies on accounting estimates and can be smoothed; cash flow is harder to fake. FCF shows the real cash a business produces after the spending needed to keep running — money it can actually return to shareholders.
Is negative free cash flow always bad?
Not always — a young, fast-growing company may spend heavily to expand, producing negative FCF for a while by choice. It’s a concern when a mature company can’t generate cash from its core operations.