Definition
Free Cash Flow is arguably the most important corporate financial metric because it measures actual cash a business generates that shareholders can benefit from — after all necessary spending. FCF = Cash Flow from Operations − Capital Expenditures. It cannot be easily gamed by accounting choices (unlike net income), making it a favorite of value investors and credit analysts. Companies with strong, growing FCF have optionality: reinvest in growth, return capital to shareholders, or de-lever. Persistent negative FCF means the business isn't self-funding and depends on external capital. FCF yield (FCF / market cap) is a valuation metric — a 5%+ FCF yield often indicates undervaluation, especially in mature businesses.
FCF = Cash Flow from Operations − Capital Expenditures
Cash Flow from Operations from the cash flow statement; Capex is 'purchases of property, plant, and equipment'. Some analysts also subtract acquisitions.
Example
Apple's fiscal 2023 Cash Flow from Operations was ~$110B, Capex ~$11B. FCF ≈ $99B. Divided by ~$3T market cap = 3.3% FCF yield. Compare to a growth-stage software company: OpCash $2B, Capex $200M = $1.8B FCF, on $50B market cap = 3.6% yield.
Frequently Asked Questions
Why is FCF better than net income?
Net income includes non-cash items (depreciation, stock-based comp) and can be manipulated by accounting choices. FCF measures actual cash — harder to fake and directly usable for dividends/buybacks/debt paydown.
What is a good FCF yield?
Depends on growth. For mature businesses, 5%+ FCF yield is often attractive. For high-growth firms, 2% may be acceptable if FCF is doubling every 2-3 years. Compare to Treasury yield for context.
Can a company have negative FCF and still be a good investment?
Yes, if the capex is investing in high-return growth (e.g., Amazon's decade of negative FCF built dominant infrastructure). Assess: are the investments earning returns above the cost of capital?