Free cash flow (FCF) is the real money a company has left after paying its day-to-day expenses and the investments needed to keep the business running. For many investors it's the most honest figure of all.
How it's calculated
The idea is simple:
- FCF = Cash from operations − Investments (CapEx)
First, the money that actually comes in from the activity (not accounting profit, but cash). Then you subtract what the company spends maintaining and expanding its assets: factories, machines, technology (called CapEx, or capital expenditure). What's left is free cash flow: money available to the owners of the business.
An example with numbers
Imagine a company that in one year generates $1,000 million of cash from its operations and spends $300 million maintaining and expanding its factories and equipment (CapEx). Its free cash flow is:
- 1,000 − 300 = $700 million of free cash flow
Those $700 million are the money it genuinely has left over, without borrowing, to pay dividends, buy back shares or reduce debt. Even if its accounting profit were different (higher or lower), this is the real cash it generated.
Why it matters so much
With that money, and only that, a company can do good things for shareholders without borrowing: paypay dividends, buy back its own shares, reduce debt or fund its growth. A company that generates lots of free cash flow has freedom; one that doesn't depends on borrowing or issuing new shares (which dilute shareholders).
Free cash flow vs operating cash flow: not the same
This is the most common confusion. Operating cash flow is only the first step: the money coming in from the business activity, before investing. Free cash flow goes one step further and subtracts the investment (CapEx) needed to sustain that business. That's why FCF is stricter and more realistic: a company can have huge operating cash flow but, if it must reinvest almost all of it in machines or factories, its free cash flow will be small. Free cash flow is what truly remains for shareholders.
Harder to dress up than profit
Accounting profit can be "polished" with accounting choices (how revenue is recognized, how things are depreciated…). Cash, by contrast, is either in the bank or it isn't. That's why free cash flow is more reliable than profit for spotting whether a company really makes money. A classic warning sign: profits rising year after year while free cash flow doesn't follow.
What is a good free cash flow
The absolute number says little on its own. To compare companies of different sizes you use the free-cash-flow margin: FCF divided by revenue. As a general reference, above 10-15% is very good and above 20% excellent. Another way to look at it is the free cash flow yield: FCF divided by the company's market value, which shows how much cash it generates for every dollar you pay for the stock. The higher it is, the cheaper the company is in cash terms.
When negative FCF isn't bad
Be careful reading it at face value. A young company in full expansion may invest more than it generates (negative FCF) on purpose, to grow fast. That can be a good decision. What matters is understanding why it's negative: if it's growth investment, it may be fine; if the business simply burns cash with no direction, it's a warning sign.
How to use it
Free cash flow, alongside debt, defines a company's financial strength. It complements EBITDA (which ignores investments) and net margin. At StockSemáforo, the FCF margin feeds the Financial-health score. To see it for any company, type its ticker into the analyzer.