What is free cash flow?
Free cash flow is the cash left over once a business has paid its operating costs and invested in the assets it needs to keep running. Investors often prefer it to profit because it's harder to manipulate with accounting choices.
Formula
FCF = [Operating cash flow](/glossary/operating-cash-flow) − [Capital expenditure](/glossary/capital-expenditure)
Variants include free cash flow to firm (FCFF) and free cash flow to equity (FCFE), which adjust for interest and borrowing.
Example
A company generates $400,000 of operating cash flow and spends $150,000 on new equipment. Free cash flow = $250,000.
What it's used for
- Repaying debt
- Paying [dividends](/glossary/dividend) or buying back shares
- Funding acquisitions or expansion
- Building cash reserves
Interpreting it
- Positive and growing FCF: strong, self-funding business.
- Negative FCF: not always bad; a fast-growing company may be investing heavily. Check whether the investment is likely to pay off.
- FCF margin = FCF ÷ Revenue, useful for comparisons.
FCF vs EBITDA
[EBITDA](/glossary/ebitda) ignores capital spending and working capital; FCF includes both, so it's a more conservative measure.