Free Cash Flow
Operating cash flow minus capital expenditures. The actual cash a business generates after maintaining and growing its assets.
Formula
Free Cash Flow = Operating Cash Flow − Capital Expenditures
Free cash flow (FCF) is the cash left over after a company pays its operating expenses and invests in maintaining or expanding its physical asset base (capex). It is arguably the most honest measure of a business's earnings power because cash is harder to manipulate than accrual-based earnings.
FCF fuels dividends, buybacks, debt repayment, and acquisitions. A company with consistently strong FCF generation has options; one that burns cash needs external capital (equity or debt) to fund operations, which creates shareholder dilution or debt risk.
The FCF yield (FCF ÷ market cap) is the cash-flow equivalent of the earnings yield. A high FCF yield relative to peers or bonds can signal an undervalued stock.
Related Terms
Book Value
Total assets minus total liabilities on the balance sheet — what shareholders would theoretically receive if the company were liquidated today.
IntermediateDividend
A cash (or stock) payment a company makes to shareholders from its profits, typically on a quarterly schedule.
BeginnerDividend Payout Ratio
The share of earnings paid out as dividends. A low ratio leaves room to grow the dividend; a very high one signals fragility.
IntermediateEnterprise Value (EV)
The total cost to acquire a business outright: market cap plus net debt. The true takeover price, capital-structure-neutral.
IntermediateEPS (Earnings Per Share)
Net income divided by shares outstanding. EPS is the single most-watched earnings metric for valuing a stock.
BeginnerOperating Margin
Operating income as a percentage of revenue. Shows how much profit the core business earns before interest and taxes.
IntermediateRevenue
The total income a company generates from its business activities before any costs are deducted. The "top line" of the income statement.
BeginnerShare Buyback
When a company uses its cash to purchase its own shares on the open market, reducing shares outstanding and boosting EPS.
Intermediate