Free cash flow (FCF) is the cash a company has left over after paying for the day-to-day running of the business AND the investment needed to maintain and grow it. It is the money truly "free" to pay dividends, buy back shares, cut debt, or reinvest — and it is much harder to fake than reported profit.
Free cash flow = operating cash flow − capital expenditures (the spending on equipment, property, and other long-lived assets). Example (illustrative): a company generates $900 million of cash from operations and spends $300 million on capital expenditures. Its free cash flow is 900 − 300 = $600 million — the cash actually available to return to shareholders or reinvest, after keeping the business running.
Reported net income includes non-cash accounting entries (depreciation, accruals) and can be shaped by judgement calls. Cash is cash. A company can post a healthy profit while free cash flow is negative — a warning that the reported earnings aren't turning into spendable money. Persistent, growing free cash flow is one of the strongest signs of a durable business; chronically negative FCF (outside deliberate heavy-growth phases) is a red flag.
Free cash flow is the reality check behind per-share profitability measures like earnings per share, and it is what ultimately funds a dividend. The underlying figures come from the cash-flow statement in a company's SEC filings, free on EDGAR. None of this is investment advice.
Take the cash a company generates from operations and subtract its capital expenditures (spending on equipment, property, and other long-lived assets). $900 million of operating cash flow minus $300 million of capex is $600 million of free cash flow.
It isn't strictly better, but it is harder to manipulate. Reported profit includes non-cash entries and judgement calls; cash is cash. A profitable company with negative free cash flow is a warning sign.
Not always. A young company deliberately investing heavily for growth may run negative FCF for a time. It is chronic, unexplained negative FCF in a mature business that should worry an investor.
Browse all S&P 500 tickers to see this metric applied to individual companies.
Educational research only — not investment advice.