Short definition: Free cash flow (FCF) is the cash flow generated by a company’s operations that is available for distribution to investors (both debt and equity holders) after accounting for capital expenditures.
Explanation: FCF represents the cash a company has left over after paying for its operating expenses and investments in its business. It is a key metric for investors as it indicates a company’s ability to generate cash to pay dividends, reduce debt, or reinvest in growth opportunities.
Example: FCF can be calculated in different ways, but a common formula is:
FCF = Operating Cash Flow – Capital Expenditures
Additional information (optional): There are two main types of FCF: levered free cash flow (LFCF) and unlevered free cash flow (UFCF). LFCF considers the cash flow available to equity holders after debt obligations have been met, while UFCF represents the cash flow available to all investors before any debt payments.