Free cash flow

Definition

Free cash flow (FCF) is the amount of cash generated by a company after accounting for capital expenditures necessary to maintain or expand its asset base. It is a key indicator of a company's financial health and its ability to generate additional revenue.

5 Must Know Facts For Your Next Test

1. Free cash flow is calculated as operating cash flow minus capital expenditures.
2. Positive free cash flow indicates that a company has sufficient funds to pay dividends, reduce debt, or reinvest in the business.
3. Negative free cash flow may signal potential liquidity issues or significant investments in growth.
4. FCF is an important metric for investors as it reflects the actual cash available for distribution or reinvestment.
5. Free cash flow can be impacted by changes in working capital, such as accounts receivable and inventory levels.

Review Questions

• How do you calculate free cash flow?
• What does positive free cash flow indicate about a company's financial health?
• Why is free cash flow considered an important metric for investors?

Related terms

Operating Cash Flow: The total amount of money generated from a company's core business operations.

Capital Expenditures: Funds used by a company to acquire, upgrade, and maintain 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.