Free Cash Flow
Cash from operations (CFO) minus capital expenditures. The cash the firm generates after maintaining its asset base — the foundation of equity valuation, dividend capacity, and buyback funding.
When to use: The single most-watched cash flow metric. FCF drives DCF valuation, sets the upper bound on dividends and buybacks, and is the cleanest measure of "real" earnings power. Persistent FCF generation is what separates durable businesses from accounting-only profitable ones.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| FCF | Free Cash Flow | CFO − CapEx | $ |
| CFO | Cash Flow from Operations | Net cash generated by operating activities (from the cash flow statement) | $ |
| CapEx | Capital Expenditures | Cash spent on property, plant, and equipment | $ |
Real-Life Examples
Example 1: Mid-Cap Industrial
Cash from operations $500M, capital expenditures $150M.
Given
Step-by-Step
$350M of free cash flow — the cash actually available for shareholders, debt reduction, M&A, or reinvestment beyond the maintenance level. Compare to net income to see how clean (cash-backed) the earnings are.
Frequently Asked Questions
Because CFO alone overstates "free" cash — the firm has to keep replacing depreciating assets to maintain operations. Subtracting CapEx accounts for the maintenance reinvestment required.
Some analysts split CapEx into maintenance (replacing existing assets) and growth (expanding the business). FCF using maintenance CapEx only ("owner earnings," per Buffett) gives a more conservative true free-cash-flow measure. Most disclosed CapEx mixes both.
Yes — for high-growth firms investing heavily in expansion. Tesla and Amazon ran negative FCF for years while scaling. Persistent negative FCF in a mature business is a red flag; in a growth business it can be appropriate temporarily.