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What Is Free Cash Flow?

Steven Levine, Founder of TickerPosts and OpenClassActions.com1 min readLast reviewed
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Free cash flow is a way to look at how much cash a company generates after the spending needed to maintain and grow the business. Investors often compare it with earnings because accounting profit and cash generation can differ.

A common free-cash-flow formula

A common starting formula is:

  • Free cash flow = operating cash flow − capital expenditures

Operating cash flow comes from the cash-flow statement. Capital expenditures are cash spent on property, equipment, technology infrastructure, stores, factories, or other long-lived assets.

Different analysts may adjust the formula, but the core question is the same: after running the business and investing in necessary assets, how much cash is left?

Why free cash flow matters

Free cash flow can support several uses:

  • Paying down debt.
  • Funding new products or expansion.
  • Paying dividends.
  • Buying back shares.
  • Building cash reserves.

A company with rising earnings but consistently weak cash flow may deserve a closer look. The gap could come from working-capital timing, heavy growth investment, accounting items, or business stress.

What to check before relying on it

Free cash flow can be lumpy. A manufacturer, utility, or telecom company may have large capital spending needs. A software company may have lighter physical investment but other costs to watch.

Compare free cash flow over several periods, not just one quarter. Read the cash-flow statement and management discussion to understand why cash rose or fell.

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