What is free cash flow, and why does it matter?
Free cash flow (FCF) is the cash a business generates from operations after paying for the investment needed to maintain and grow its operations.
A common definition
Free cash flow = operating cash flow minus capital expenditure.
Operating cash flow comes from the cash flow statement. Capital expenditure is the cash spent on property, plant, equipment and similar long-term assets.
Why people use it
Profit includes non-cash items and accounting estimates. FCF shows how much cash is left to repay debt, pay dividends or reinvest.
Cautions
- Definitions vary. Some analysts also deduct lease payments or add back certain items. State the definition you use.
- One year can mislead. A year of heavy investment will lower FCF even if the investment is sensible. Look at several years.
- Working capital swings. A temporary release or build-up in working capital can move operating cash flow.
- Banks and financial companies treat cash flows differently, so the measure may not be useful for them.
Example (illustrative numbers only)
If operating cash flow is 120 and capital expenditure is 70, free cash flow is 50. These numbers are for explanation only and do not describe any company.
Sources and further reading
- Further reading, not opened by us: Ind AS 7, Statement of Cash Flows (the standard that defines how operating cash flow is presented in Indian company accounts). Find the current text on mca.gov.in. This note's "free cash flow" definition is a common analyst convention, not a term defined by that standard.
None of these entries has been opened by us; please locate each one on the publisher’s own website. Web pages can change or move. Where a statement in this note is a general characterisation rather than a cited fact, it is not tied to a specific source.