Free Cash Flow
Industry:
Market-Wide
Valuation
Profitability
Liquidity
Aliases:
Back to Metric-dictionary
Short Definition
Free Cash Flow (FCF) is the cash a company generates from core operations after funding capital expenditures (CapEx). It’s the cash left to reinvest, repay debt, or return to shareholders.
Short Definition
Free Cash Flow (FCF) is the cash a company generates from core operations after funding capital expenditures (CapEx). It’s the cash left to reinvest, repay debt, or return to shareholders.
Short Definition
Free Cash Flow (FCF) is the cash a company generates from core operations after funding capital expenditures (CapEx). It’s the cash left to reinvest, repay debt, or return to shareholders.
Why it matters for Investors
Cash truth: Cuts through accrual noise; shows real cash generation.
Flexibility: Fuels growth, M&A, buybacks, and debt paydown.
Valuation anchor: Core input to DCFs and “quality of earnings” screens.
Why it matters for Investors
Cash truth: Cuts through accrual noise; shows real cash generation.
Flexibility: Fuels growth, M&A, buybacks, and debt paydown.
Valuation anchor: Core input to DCFs and “quality of earnings” screens.
Why it matters for Investors
Cash truth: Cuts through accrual noise; shows real cash generation.
Flexibility: Fuels growth, M&A, buybacks, and debt paydown.
Valuation anchor: Core input to DCFs and “quality of earnings” screens.
Formula
Practical considerations -
Be explicit on scope: Default is CFO − CapEx (from the cash-flow statement).
CapEx includes PP&E and capitalized software/R&D/implementation costs (policy-dependent).
Exclude financing: Do not include debt/equity cash flows; usually exclude M&A unless you label “FCF after M&A.”
Working capital (WC) swings: CFO already includes Δ AR/Δ AP/Δ Inventory; if lumpy, also show FCF ex-WC for insight (but label it).
Leases: Clarify if you subtract lease principal (some show both “pre-lease” and “post-lease”).
Be consistent: Same definition every period; reconcile any “Adjusted FCF.”
Formula
Practical considerations -
Be explicit on scope: Default is CFO − CapEx (from the cash-flow statement).
CapEx includes PP&E and capitalized software/R&D/implementation costs (policy-dependent).
Exclude financing: Do not include debt/equity cash flows; usually exclude M&A unless you label “FCF after M&A.”
Working capital (WC) swings: CFO already includes Δ AR/Δ AP/Δ Inventory; if lumpy, also show FCF ex-WC for insight (but label it).
Leases: Clarify if you subtract lease principal (some show both “pre-lease” and “post-lease”).
Be consistent: Same definition every period; reconcile any “Adjusted FCF.”
Formula
Practical considerations -
Be explicit on scope: Default is CFO − CapEx (from the cash-flow statement).
CapEx includes PP&E and capitalized software/R&D/implementation costs (policy-dependent).
Exclude financing: Do not include debt/equity cash flows; usually exclude M&A unless you label “FCF after M&A.”
Working capital (WC) swings: CFO already includes Δ AR/Δ AP/Δ Inventory; if lumpy, also show FCF ex-WC for insight (but label it).
Leases: Clarify if you subtract lease principal (some show both “pre-lease” and “post-lease”).
Be consistent: Same definition every period; reconcile any “Adjusted FCF.”
Worked Example
Line item (TTM) | Amount | Notes |
|---|---|---|
Cash Flow from Operations | $8,400,000 | From cash-flow statement; includes working capital |
Capital Expenditures (CapEx) | $3,200,000 | PP&E + capitalized software |
Free Cash Flow (FCF) | $5,200,000 | CFO − CapEx |
Revenue | $52,000,000 | For margin calculation |
FCF Margin % | 10% | 5.2 ÷ 52.0 × 100 |
Notes
State your policy: Exactly what’s in CapEx and whether leases/M&A are included.
One-offs: Call out unusual cash items (tax refunds, settlements, big prepaids).
TTM preferred: Smoother and comparable vs. a single quarter.
Worked Example
Line item (TTM) | Amount | Notes |
|---|---|---|
Cash Flow from Operations | $8,400,000 | From cash-flow statement; includes working capital |
Capital Expenditures (CapEx) | $3,200,000 | PP&E + capitalized software |
Free Cash Flow (FCF) | $5,200,000 | CFO − CapEx |
Revenue | $52,000,000 | For margin calculation |
FCF Margin % | 10% | 5.2 ÷ 52.0 × 100 |
Notes
State your policy: Exactly what’s in CapEx and whether leases/M&A are included.
One-offs: Call out unusual cash items (tax refunds, settlements, big prepaids).
TTM preferred: Smoother and comparable vs. a single quarter.
Worked Example
Line item (TTM) | Amount | Notes |
|---|---|---|
Cash Flow from Operations | $8,400,000 | From cash-flow statement; includes working capital |
Capital Expenditures (CapEx) | $3,200,000 | PP&E + capitalized software |
Free Cash Flow (FCF) | $5,200,000 | CFO − CapEx |
Revenue | $52,000,000 | For margin calculation |
FCF Margin % | 10% | 5.2 ÷ 52.0 × 100 |
Notes
State your policy: Exactly what’s in CapEx and whether leases/M&A are included.
One-offs: Call out unusual cash items (tax refunds, settlements, big prepaids).
TTM preferred: Smoother and comparable vs. a single quarter.
Best Practices
Publish a reconciliation: GAAP CFO → FCF (show CapEx lines clearly).
Track both dollars and %: FCF and FCF Margin (%).
Segment if useful: Product/region to spot cash drainers.
Pair with efficiency: Watch Gross Margin, Burn Multiple, Rule of 40, CAC Payback.
Best Practices
Publish a reconciliation: GAAP CFO → FCF (show CapEx lines clearly).
Track both dollars and %: FCF and FCF Margin (%).
Segment if useful: Product/region to spot cash drainers.
Pair with efficiency: Watch Gross Margin, Burn Multiple, Rule of 40, CAC Payback.
Best Practices
Publish a reconciliation: GAAP CFO → FCF (show CapEx lines clearly).
Track both dollars and %: FCF and FCF Margin (%).
Segment if useful: Product/region to spot cash drainers.
Pair with efficiency: Watch Gross Margin, Burn Multiple, Rule of 40, CAC Payback.
FAQs
FCF quality red flags?
Under-invested CapEx, big one-off cash boosts, aggressive working-capital pulls, or sudden spikes in capitalized costs.Does FCF include stock comp?
Yes—stock comp is non-cash in CFO; FCF uses reported CFO (which already includes it).Does FCF include asset sale proceeds?
Usually no (use CapEx purchases only). If you net proceeds, disclose and keep consistent.What’s the difference vs. Operating Cash Flow?
OCF/CFO is before CapEx; FCF = CFO − CapEx.Unlevered vs. levered FCF?
Standard FCF above is to the firm (unlevered). FCFE (to equity) also subtracts net debt changes—label clearly if you use it.Can negative FCF be OK?
Yes, for high-growth phases—if unit economics are solid and the Burn Multiple is improving.
FAQs
FCF quality red flags?
Under-invested CapEx, big one-off cash boosts, aggressive working-capital pulls, or sudden spikes in capitalized costs.Does FCF include stock comp?
Yes—stock comp is non-cash in CFO; FCF uses reported CFO (which already includes it).Does FCF include asset sale proceeds?
Usually no (use CapEx purchases only). If you net proceeds, disclose and keep consistent.What’s the difference vs. Operating Cash Flow?
OCF/CFO is before CapEx; FCF = CFO − CapEx.Unlevered vs. levered FCF?
Standard FCF above is to the firm (unlevered). FCFE (to equity) also subtracts net debt changes—label clearly if you use it.Can negative FCF be OK?
Yes, for high-growth phases—if unit economics are solid and the Burn Multiple is improving.
FAQs
FCF quality red flags?
Under-invested CapEx, big one-off cash boosts, aggressive working-capital pulls, or sudden spikes in capitalized costs.Does FCF include stock comp?
Yes—stock comp is non-cash in CFO; FCF uses reported CFO (which already includes it).Does FCF include asset sale proceeds?
Usually no (use CapEx purchases only). If you net proceeds, disclose and keep consistent.What’s the difference vs. Operating Cash Flow?
OCF/CFO is before CapEx; FCF = CFO − CapEx.Unlevered vs. levered FCF?
Standard FCF above is to the firm (unlevered). FCFE (to equity) also subtracts net debt changes—label clearly if you use it.Can negative FCF be OK?
Yes, for high-growth phases—if unit economics are solid and the Burn Multiple is improving.
Related Metrics
Parents: Operating Cash Flow (CFO), CapEx
Children / Components: Δ Working Capital, Capitalized Software, Lease Principal (if included)
Commonly mistaken for:
Operating Cash Flow (CFO): Before CapEx.
EBITDA: Non-cash, pre-working-capital; not cash.
FCFE: FCF after net financing flows to equity; different denominator for margin.
Related Metrics
Parents: Operating Cash Flow (CFO), CapEx
Children / Components: Δ Working Capital, Capitalized Software, Lease Principal (if included)
Commonly mistaken for:
Operating Cash Flow (CFO): Before CapEx.
EBITDA: Non-cash, pre-working-capital; not cash.
FCFE: FCF after net financing flows to equity; different denominator for margin.
Related Metrics
Parents: Operating Cash Flow (CFO), CapEx
Children / Components: Δ Working Capital, Capitalized Software, Lease Principal (if included)
Commonly mistaken for:
Operating Cash Flow (CFO): Before CapEx.
EBITDA: Non-cash, pre-working-capital; not cash.
FCFE: FCF after net financing flows to equity; different denominator for margin.
Back to Metric-dictionary
Index