Meaning
Free cash flow is cash left after operating cash flow covers capital expenditures.
Formula
Operating cash flow - capital expenditures
Practical reading
Sustainable positive free cash flow gives a company flexibility for reinvestment, debt reduction, dividends or buybacks.
Calculation detail
Free cash flow = operating cash flow β capital expenditures. It measures cash remaining after maintaining and expanding the asset base; definitions can differ when providers adjust for leases or acquisitions.
What to check
Positive FCF over a full cycle gives management options: reinvestment, debt reduction, dividends or buybacks. Check the FCF margin and conversion from net income.
Limits and caveats
A fast-growing company can have low or negative FCF because it is investing heavily; that is not automatically a failure if returns on those investments are attractive.