Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, FCF is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets.
Why FCF Matters
Investors use FCF to determine how much cash a company has to:
- Pay dividends
- Buy back shares
- Reduce debt
- Reinvest in the business
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A company with consistently high FCF is often better positioned to weather economic downturns and reward shareholders.
Calculating FCF
The simplest way to calculate FCF is:
Operating Cash Flow - Capital Expenditures = Free Cash Flow
Stay tuned for more deep dives into financial metrics!