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Metric · Cash Flow

Free Cash Flow (FCF) Explained

Free cash flow (FCF) shows how much money is actually left over for a company after investing in its operating business: money available for dividends, debt reduction or buybacks.

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Updated 20266 min read
Formula
FCF = Operating cash flow − Capital expenditures (Capex)
Clearly positiveCovers dividend & debt
Slightly positiveGrowth phase possible
NegativeNeeds explanation
Guideline values, industry-dependent, illustrative

The formula in detail

The components of the formula at a glance.

Starting point
Operating cash flow
Cash generated from ongoing operations.
Deduction
Capital expenditures (Capex)
Spending on fixed assets and capital goods.

Calculator

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Result FCF
Positive free cash flow
500
1
Reported net income can be shaped more easily by accounting choices (depreciation, provisions) than the actual cash inflow.
2
Positive FCF shows a company can invest, reduce debt or pay dividends from its own strength, without additional borrowing.
3
Negative FCF is normal for young growth companies with heavy investment, but a warning sign for established companies.
4
If FCF consistently exceeds net income, that points to high earnings quality.

Used in these strategies

Piotroski F-Score (9-Point Check)Nine hard balance-sheet criteria: separating substance from downward spirals.Dividend Quality: 4 FactorsFour factors against the dividend trap: continuity, coverage, yield, growth.

Frequently asked questions

The company is investing more than it earns operationally. For young growth companies this can be strategically intended; for mature companies it's usually a warning sign.
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Not investment advice. This explanation is for informational purposes only and does not constitute a recommendation to buy or sell securities.

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