Free Cash Flow measures the cash a company generates after accounting for capital expenditures needed to maintain or expand its asset base.
Free Cash Flow represents the cash available to a company after it has paid for operating expenses and capital expenditures necessary to maintain or grow the business. Unlike accounting earnings, FCF shows actual cash generation and is harder to manipulate. It's the cash available for dividends, share buybacks, debt repayment, or acquisitions—making it crucial for valuing companies and assessing financial health.
A company with $10B operating cash flow and $3B capital expenditures has FCF of $10B - $3B = $7B. This is the cash available after maintaining the business.
Strong positive FCF indicates a healthy business that generates more cash than it needs to maintain operations. Ideal for dividends and growth investments.
Negative FCF may indicate heavy investment in growth (acceptable for young companies) or operational problems (concerning for mature companies).
Mature companies should consistently generate positive FCF. Growing companies may have negative FCF temporarily while investing in expansion.
