EuroCalc

What is Free Cash Flow?

Free cash flow (FCF) is the cash a business generates from operations after deducting the capital expenditures needed to maintain or expand its asset base — the cash truly available to shareholders, lenders and reinvestment.

FCF is the workhorse metric of valuation. Discounted cash flow (DCF) models discount projected free cash flows to derive an intrinsic share price. Investors prize companies that grow FCF per share consistently.

Two flavours exist: FCF to the firm (FCFF, before financing) and FCF to equity (FCFE, after interest and net debt issuance). Strong FCF lets a company pay dividends, buy back shares, repay debt and acquire competitors without raising external capital.

Formula
Free Cash Flow = Operating Cash Flow − Capital Expenditures
Example

A manufacturer generates CHF 1.2m in operating cash flow and spends CHF 400k on capex — FCF is CHF 800k, of which the board pays CHF 300k as dividends and reinvests CHF 500k in growth.

Related terms

Cash Flow

Cash flow is the net amount of cash moving into and out of a business during a period, measuring the actual liquidity created or consumed rather than accounting profit.

Capital Expenditure (CapEx)

Capital expenditure is money a business spends to acquire, upgrade or maintain long-lived physical assets such as buildings, machinery, vehicles or technology infrastructure, capitalised on the balance sheet and depreciated over their useful life.

Operating Profit

Operating profit (or operating income, EBIT) is what a business earns from its core operations after deducting both the direct cost of sales and all operating expenses, but before interest and tax.

Cash Flow Statement

The cash flow statement reports the actual cash entering and leaving a business over a period, split into operating, investing and financing activities.

Frequently asked questions

Why subtract capex?+

Because keeping the business running requires replacing equipment and infrastructure; that cash is not really 'free'.

Can FCF be negative?+

Yes — typical for growth-stage businesses investing heavily in expansion ahead of profits.

How does FCF differ from EBITDA?+

EBITDA ignores capex and working capital; FCF deducts both, so it more honestly reflects cash discipline.