Free cash flow
FCF
The cash actually left over after the business has paid to keep itself alive.
Free cash flow is operating cash flow minus capital expenditure. It is the money genuinely available to pay dividends, buy back shares, repay debt, or make acquisitions, without borrowing.
It is the single most honest number in a set of accounts, because it is very hard to manufacture. Accounting profit can be shaped by judgement calls on when revenue is recognised and how costs are spread. Cash either arrived or it did not.
This is why a discounted cash flow model is built on free cash flow rather than earnings: it is the number that corresponds to what an owner could actually take out of the business.
Free cash flow = Operating cash flow − Capital expenditureThe divergence that precedes most disasters
Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.
A company that grows profit while free cash flow stagnates is usually converting accounting entries into a story. The cash tells you whether the story is true.
Ignoring the capex line. A company can post rising operating cash flow while spending every penny of it (and more) on equipment just to stand still.
Related terms
See Free cash flow on a real company
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