Definition
Free Cash Flow
Free cash flow (FCF) is the cash a company has left after paying operating expenses and capital expenditure, available to reward investors or grow.
FCF = Operating Cash Flow minus Capital Expenditure. It is the real cash a business generates after maintaining and expanding its assets, money it can use for dividends, buybacks, debt repayment, or acquisitions. Unlike reported profit, FCF is harder to manipulate with accounting.
Consistent, growing FCF is a hallmark of a high-quality business and is the foundation of DCF valuation. A company can show accounting profits yet bleed cash, so savvy investors prize cash flow over headline earnings.
Related terms
- EV/EBITDAEV/EBITDA compares a company's enterprise value to its earnings before interest, tax, depreciation, and amortisation, a capital-structure-neutral valuation measure.
- Dividend Payout RatioThe dividend payout ratio is the share of net profit a company distributes to shareholders as dividends, with the rest retained for growth.
- Discounted Cash Flow (DCF)DCF is a valuation method that estimates a company's worth by projecting its future cash flows and discounting them back to today's value.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.