Glossary
Free cash flow (FCF)
Operating cash flow minus capital expenditures: the cash a business generates that is left for owners and lenders.
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Free cash flow (FCF) is the cash a company produces from its operations after paying for the investment needed to maintain and grow its asset base. It is what management can use to pay dividends, buy back stock, repay debt or make acquisitions without borrowing or issuing shares. Many investors trust it more than net income because accounting choices move earnings more easily than they move cash.
How it works
The common definition uses two lines from the cash flow statement.
Variants and pitfalls
- Levered versus unlevered. The simple formula is after interest payments (levered). Valuation models such as DCF often use unlevered FCF, before interest, to value the whole enterprise.
- Non-GAAP. FCF has no single official definition; companies choose their own, and some exclude items like acquisition costs or lease payments. Read the reconciliation.
- Stock-based compensation is added back in operating cash flow because it is non-cash, which can make FCF look better than the economic cost to shareholders.
- Lumpy capex. A year of heavy investment depresses FCF; a year of cutbacks inflates it. Look at several years.
- Working-capital swings, such as delaying payments to suppliers, can boost one year's figure at the expense of the next.