Free cash flow

The simplest definition is operating cash flow minus capital expenditure, the money spent on property, equipment and similar long-term assets. What remains is cash the company is free to use: paying dividends, buying back shares, repaying debt, making acquisitions or building up reserves. Analysts use variants. Free cash flow to the firm is measured before interest payments and belongs to all providers of capital; free cash flow to equity is measured after interest and debt flows and belongs to shareholders. Companies' own reported figures may follow their own definitions.

Free cash flow is prized because it is harder to manipulate than reported profit, and because a business is ultimately worth the cash it can return to its owners over time, which is the basis of discounted cash flow valuation. Comparing it with profit reveals the quality of earnings. A single year can mislead, though. A company investing heavily may show low or negative free cash flow while building future value, and one that cuts essential investment can boost free cash flow now at the expense of later years. Looking at several years helps.