Glossary
Free cash flow
The cash a business produces from its operations after paying for the investment it needs to keep going.
Free cash flow is usually calculated as cash flow from operations minus capital expenditure (spending on buildings, equipment and other long-lived assets).
It matters because reported profit includes estimates and timing choices, while cash is harder to dress up. A company that reports growing profits but little free cash flow, year after year, deserves a closer look.
Free cash flow pays for dividends, buybacks, debt repayment and acquisitions. Negative free cash flow is normal for a young company investing to grow; it is a warning sign in a mature one.
Related terms
- Accruals: The part of reported profit that has not arrived as cash yet.
- Dividend payout ratio: The share of a company's profit it pays out as dividends.
- Return on invested capital (ROIC): How much profit a company earns on the money invested in it by shareholders and lenders.