Free cash flow

Definition

Free cash flow (FCF) is the amount of cash generated by a company after accounting for capital expenditures needed to maintain or expand its asset base. It indicates how much cash is available to be returned to shareholders, reduce debt, or reinvest in the business.

5 Must Know Facts For Your Next Test

1. FCF is calculated as Cash Flow from Operating Activities minus Capital Expenditures.
2. Positive FCF indicates that a company has sufficient liquidity to support growth, pay dividends, and repay debt.
3. Negative FCF may signal potential liquidity issues or significant investments in future growth.
4. FCF is critical for assessing a company's financial health, particularly its ability to generate surplus cash.
5. Investors use FCF to evaluate the profitability and risk of investing in a company.

Review Questions

Related terms

Cash Flow from Operating Activities: The net amount of cash generated from the core business operations.

Capital Expenditures:

Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

Liquidity:

The ability of a company to meet its short-term obligations using its most liquid assets.