free cash flow

Imagine your monthly take-home pay after taxes. It feels like 'your money,' but some of it is already spoken for: you must keep your car running and replace the worn tyres just to keep getting to work. Only what is left after those unavoidable upkeep costs is truly free for you to save, invest, or spend as you like. Free cash flow is a business's version of that genuinely-leftover money.

Free cash flow is the cash a company has left from its operations after paying for the investments needed to maintain and grow its asset base. The simplest intro-level formula is: free cash flow = operating cash flow − capital expenditures (the cash spent on property, plant and equipment, which comes from the investing section). For example, if operating cash flow is 70,000 and the company spent 30,000 on new equipment, free cash flow is 40,000. That 40,000 is what is available to repay debt, pay dividends, buy back shares, or build a cushion.

Investors love free cash flow because it captures cash that is genuinely discretionary — money the business could hand to its owners without starving itself of the equipment it needs to keep running. A company can be profitable and even have decent operating cash flow yet have little or no free cash flow if it must constantly pour money into new assets. Note that 'free cash flow' is not a number defined by accounting standards, so different sources compute it slightly differently (for instance, some subtract only maintenance capital spending) — always check the definition behind the number.