Glossary
Free Cash Flow
The cash a company has left from operations after paying for the equipment and property it needs to keep running.
Profit and cash are not the same thing. Accounting profit involves judgments about when to recognize revenue and how to spread the cost of an asset across years. Cash is the balance in the account. Free cash flow measures the second: money generated by the business, minus what was spent on physical assets to keep it going.
It is the figure behind most of what a company can actually do next. Dividends, buybacks, debt repayment, and acquisitions all require cash rather than accounting profit, so a company reporting a profit while producing no cash is describing something worth understanding.
Free cash flow can swing hard from year to year for entirely ordinary reasons. A company building a new factory spends heavily in the years it is being built and nothing in the years after, so a single year's figure often says more about the construction schedule than about the business.
Related terms
- Net IncomeWhat is left of revenue after every expense, interest payment, and tax has been subtracted: the bottom line.
- DividendA cash payment a company makes to its shareholders out of profits, most often once a quarter.
- Debt-to-Equity RatioHow much a company owes compared with what shareholders own, where a ratio of 1 means the two are equal.
- BuybackA company using its own cash to purchase its own shares on the open market, reducing the number outstanding.
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