Quick Definition: Free cash flow (FCF) is a measure of profitability that tells you how much cash a company makes after spending on everything required to maintain and grow the business. It is calculated by subtracting capital expenditures from operating cash flow.
Formula: Free Cash Flow = Operating Cash Flow – Capital Expenditures
Why it matters
Companies with positive free cash flow are generating more cash than they need.
They can return this cash to shareholders via dividends or share buybacks, or use the cash for some bigger investments like acquisitions.
Unlike earnings and EPS, it is much more difficult to fake the free cash flow number using accounting tricks. Because of this, some investors see it as a more accurate measure of profitability.