Free cash flow (FCF) is the cash a company has left after running the business and paying for the equipment, buildings and software it needs. The simple version, used across Investingly:
free cash flow = cash from operations − capital expenditures
Both numbers come straight from the cash flow statement in a company's 10-K or 10-Q.
Why not just use earnings?
- Earnings include non-cash items. Depreciation, stock-based pay, write-downs and accounting estimates all move net income without moving cash.
- Earnings ignore investment needs. Two companies can earn the same, but if one has to reinvest most of it in new plants to stay competitive, its owners get far less.
- Cash is harder to fake. It either arrived in the bank account or it didn't.
Things to watch
- Stock-based compensation. It's added back to operating cash flow, so FCF can look better than the cost to shareholders, who are diluted instead. Check the share count over time.
- Lumpy capital spending. A big build-out year can push FCF down temporarily; look at several years.
- Working capital swings. Collecting from customers faster lifts cash flow once, not forever.
- Margins. FCF as a share of revenue (FCF margin) makes companies of different sizes comparable.
Where it's used
The DCF calculator and reverse DCF calculator both start from free cash flow, and every stock page shows five years of it from the company's SEC filings. For the idea that ties them together, read what a reverse DCF is.
For education, not investment advice.