What Is Free Cash Flow (FCF)?
Cash a company generates after accounting for capital expenditures.
The Full Definition
Free cash flow is the money a company has left over after covering its operating expenses and capital expenditures (investments in equipment, facilities, etc.). It's considered one of the purest measures of financial health because it's much harder to manipulate than reported earnings. A company generating strong, growing free cash flow has the resources to pay dividends, buy back stock, reduce debt, or reinvest in growth. Many experienced investors prioritize FCF over net income when evaluating a company.
Real-World Example
A company reporting $500M in net income sounds profitable. But if it's spending $700M on capital expenditures to maintain its business, its free cash flow is negative — meaning it's actually burning through cash, which is a serious red flag.