What is Free cash flow?
Cash generated by operations after capital expenditures — the cash actually available to repay debt, pay dividends, or reinvest.
Free cash flow (FCF) is the cash a business generates after paying for the capital expenditures needed to maintain or expand its operations. It's the most reliable measure of whether a business is actually generating cash, as opposed to just accounting profit.
How to calculate
Operating cash flow - Capital expenditures (CapEx) = Free cash flow
Or from the top:
Net income + Non-cash expenses (depreciation, amortization) + Changes in working capital - Capital expenditures = Free cash flow
Why it matters more than EBITDA
EBITDA can show "healthy" results for a business that is silently consuming cash on equipment replacement. FCF is what owners can actually withdraw, lenders can be repaid from, and acquirers will pay multiples of.
Watch for
- CapEx that's actually maintenance — recorded as capital but really keeps the business running
- Working capital traps — growing receivables can make a "profitable" business cash-poor
- Lumpy CapEx years — average over 3 years to see trend
Related terms
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