What is free cash flow?
Free cash flow is the cash a company has left after paying its operating costs and the investment needed to run and grow the business. It is the money that can actually be returned to shareholders or reinvested by choice, real cash rather than an accounting profit that may exist only on paper.
Free cash flow matters because a company can report a profit and still run short of cash. Profit includes non-cash items and timing effects, while free cash flow tracks the money that truly moves. Businesses that generate strong, growing free cash flow have more freedom to pay dividends, reduce debt, repurchase shares, or fund new projects without raising outside money.
A useful companion is free-cash-flow margin, free cash flow as a share of revenue, along with cash conversion, which compares free cash flow with reported net income. When cash conversion sits near or above 100%, it is a sign that reported profits are backed by real cash rather than accounting estimates.
Frequently asked questions
How is free cash flow calculated?
A common version is operating cash flow minus capital expenditures, the money spent on property, equipment, and other long-lived assets. The result is the cash left over after keeping the business running and invested.
Why can free cash flow be more useful than net income?
Net income includes non-cash charges like depreciation and can be shaped by accounting choices. Free cash flow focuses on actual cash, so it is harder to massage and gives a clearer view of what the business can fund.