GLOSSARY // Fundamentals
Free Cash Flow (FCF)
Free cash flow is the cash a business generates from operations minus capital expenditures — the money actually left over after running and maintaining the business. FCF = operating cash flow - capex, both pulled straight from the cash flow statement.
FCF is harder to dress up than net income because it counts cash, not accruals. A company can book aggressive revenue and still show weak FCF if customers are not paying; the gap between reported earnings and free cash flow is one of the oldest red flags in accounting analysis.
It is also the input that matters for valuation. Discounted cash flow models value a company as the sum of its future free cash flows, and FCF funds everything shareholders get paid with: dividends, buybacks, and debt reduction.
A company generates $400M in operating cash flow and spends $150M on capex: FCF = 400 - 150 = $250M. At a $5B market cap, that is a 5% FCF yield (250 / 5,000) — every dollar of stock is backed by five cents of annual free cash.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.