Free cash flow refers to the cash that remains available to a business after accounting for all operating expenses and capital expenditures (CapEx). In simpler terms, it represents the money a company can use freely after it covers its essential spending.
Investors and financial analysts often use free cash flow as one of the critical indicators to assess the financial health and liquidity of a company. Positive free cash flow indicates the company has sufficient capital to pursue growth opportunities, reduce debt, pay dividends, or invest further.
To calculate free cash flow, start with operating cash flow from the company’s statement of cash flows and subtract its capital expenditures:
Free Cash Flow = Operating Cash Flow - Capital Expenditures
High or growing free cash flow signals that a company is capable of generating cash internally, making it more attractive for investors and creditors. Conversely, consistently negative or declining free cash flow may indicate financial difficulties or unsustainable operations.
In short, free cash flow is a valuable and straightforward metric that reveals how efficient a company is in generating cash, managing expenses, and expanding sustainably, helping stakeholders make more informed decisions regarding the company's financial stability and potential.
