The cash flow metric that strips out required reinvestment. Free cash flow shows what's actually left after paying for everything the business needs to keep operating and growing - the money that's genuinely available for owners, investors, or discretionary investment.
Definition
Free Cash Flow (FCF) - operating cash flow minus capital expenditures - the cash genuinely available for owners, investors, debt repayment, or discretionary growth investment after maintaining operating capacity.
Formula
Free Cash Flow = Operating Cash Flow − Capital Expenditures (CAPEX) FCF Margin = Free Cash Flow ÷ Revenue × 100%
Common uses
- Business valuation - DCF (discounted cash flow) valuations use FCF
- Dividend / distribution decisions - what can be safely paid out
- Growth investment capacity - how much can be redirected to discretionary growth
Watch out
"Maintenance CAPEX" (replacement of worn-out equipment) and "growth CAPEX" (capacity expansion) both reduce FCF, but only maintenance is truly required. Some analyses separate the two for clarity.