Free cash flow
Also called FCF.
Operating cash flow less capital expenditure: what the business actually generated for its owners.
Free cash flow = operating cash flow - capital expenditureWhat it means
Free cash flow is what remains after a company has paid its running costs and spent what it needed to keep operating. It is the number that eventually pays dividends, buys back shares, repays debt or funds acquisitions, which makes it the most consequential figure on the cash flow statement.
It is harder to flatter than earnings. Net income passes through depreciation schedules, accruals and a fair amount of judgement. Cash either arrived or it did not.
Worked example
Operating cash flow of $250m and capital expenditure of $80m.
- 1Take operating cash flow as reported.
- 2Subtract purchases of property, plant and equipment.
$170m of free cash flow, 17% of revenue.
Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.
How investors read it
- Compare it against net income across several years. Cash flow persistently below reported profit is worth understanding, and the reason is sometimes ordinary and sometimes not.
- Negative free cash flow is not automatically bad. A company building capacity may be spending well; one negative for years without revenue to show for it is a different case.
- Look at the trend. A single large equipment purchase can make a fine year look poor.
Where it misleads
- Stock-based compensation is added back as a non-cash expense even though it genuinely dilutes existing owners, so free cash flow flatters companies that pay a lot of it.
- Where the line between maintenance and growth capital expenditure falls is a judgement, and companies rarely split it.
- Working capital swings can move it sharply in a single year without anything about the business changing.
How Materiality uses it
Used in three places. It is an efficiency ratio in the Financials tab, its multi-year growth is one of the four Growth metrics in the scorecard, and it is the starting point for the intrinsic value model, which takes the latest fiscal year's operating cash flow less capital expenditure. Where it is not positive, no automatic valuation is produced at all.
The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.
Work it out yourself
Related metrics
Free cash flow yield
Free cash flow as a percentage of what the company costs to buy.
EBITDA
Operating profit with depreciation and amortisation added back.
Capital expenditure
Cash spent on the physical assets the business runs on.
Stock-based compensation
Employees paid in shares rather than cash, and why it complicates every cash flow figure.
A metric on its own is a number without a business attached to it. Materialitycomputes these from a company's own SEC filings, several years of them at once, and explains what the pattern means rather than leaving you to hold fifteen definitions in your head.