This content is free thanks to our sponsors
Sponsored Ad – I may earn a commission if you click and buy
Finance
Free Cash Flow
The cash a company generates from operations after paying for capital expenditures — the truest measure of a business's financial health.
Free Cash Flow = Operating Cash Flow − Capital Expenditures. Operating cash flow is what the business generates from its day-to-day activities. Capital expenditures are what the business must spend to maintain and grow its asset base — factories, equipment, technology infrastructure. What remains is truly free.
Investors prize FCF because it's hard to fake. Accounting profits can be manipulated through depreciation choices, revenue recognition timing, and other techniques. Cash is more difficult to doctor. A company reporting high profits but low free cash flow is a warning sign. A company with modest reported profits but surging free cash flow is often underappreciated — and potentially a great investment.