Reading the accounts
Free cash flow
Also called FCF
Cash left over after paying for the investment needed to maintain and grow the business.
How it works
Free cash flow is what can actually be returned to shareholders, used to repay debt or reinvested by choice. It is the closest single figure to what an owner cares about.
It is more resistant to accounting judgement than earnings, though not immune — the timing of payments and receipts can shift it between periods.
Where it misleads people
A single strong year can come from delaying supplier payments or postponing investment. Judge it over several years alongside capex and working capital.
Formula
FCF = operating cash flow − capital expenditureRelated terms
- Operating cash flowThe cash a company actually generated from running its business.
- Capital expenditureMoney spent buying or upgrading long-lived assets like property, equipment and technology.
- Free cash flow yieldFree cash flow divided by market value — the cash return the business generates relative to its price.
- Owner earningsReported profit adjusted to reflect the cash an owner could actually take out without harming the business.
Mentioned in
More in Reading the accounts
- GAAP and IFRS
- Fixed costs
- Going concern
- Economic profit
- Goodwill
- Earnings per share
- Gross margin
- Earnings growth
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.