Free Cash Flow (FCF)

Cash Flow Metric Investment Wiki — Fundamentals
Free Cash Flow (FCF) represents the cold, hard cash a company legally generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike Net Income, FCF cannot be doctored by accounting loopholes. It is the ultimate truth-teller of financial health.
Quick Reference
Type Cash Flow Metric
Formula Operating Cash Flow - Capital Expenditures
Good Target Consistent compounding growth
Best Used For Determining dividend safety, share buybacks, and DCF inputs

1.0 The Formula

Basic Form

formulaFCF = Cash from Operations - Capital Expenditures (CapEx)

You can find these numbers directly on the Statement of Cash Flows. Cash from Operations tracks actual money hitting the bank from selling goods. CapEx tracks the hard money spent to maintain roofs, buy new servers, or replace delivery trucks.

What is it used for?

Once a company pays for its operations and its CapEx, the remaining Free Cash Flow can be used to:

  • Pay dividends to shareholders.
  • Buy back stock.
  • Acquire smaller companies.
  • Pay down long-term debt.

2.0 Interpretation & Edge Cases

Negative FCF is completely normal for fast-growing startups aggressively building out infrastructure (high CapEx). However, sustained negative FCF for mature companies signifies a broken business model requiring constant debt injection or share dilution.

Watch out for Stock-Based Compensation (SBC). In the Cash Flow statement, SBC is added back to Cash from Operations because it’s a "non-cash" expense. Many modern analysts subtract SBC directly out of FCF to find the true, un-diluted Unlevered FCF.

3.0 Related Pages

Free Cash Flow Yield

Compares FCF against Market Cap to test valuation.

Discounted Cash Flow (DCF)

FCF is the core input that gets discounted backward in time to establish intrinsic value.