Formula
Free Cash Flow = Operating Cash Flow − Capital Expenditures FCF Yield = Free Cash Flow per Share ÷ Share Price
The Short Version
Free cash flow is the actual cash a company generates after paying for the operating expenses and capital investments needed to run the business. Many analysts consider it a truer measure of financial health than net income, because it's harder to manipulate with accounting choices.
Explain It Like I'm 10
Imagine your allowance is $50 a month (like a company's incoming cash), but you have to spend $30 every month on required school supplies and fixing your bike (like a company's operating costs and equipment). What's actually left over for you to save or spend on whatever you want is $20 — that leftover 'free cash' is exactly what Free Cash Flow measures for a company: real spare cash left after paying for the stuff the business truly needs.
Step-by-Step Example
- 1 Operating cash flow (cash the business generated from running day to day): $80,000,000.
- 2 Capital expenditures (cash spent on equipment, buildings, etc.): $30,000,000.
- 3 Subtract: FCF = $80,000,000 − $30,000,000 = $50,000,000.
- 4 Shares outstanding: 25,000,000 → FCF per share = $50,000,000 ÷ 25,000,000 = $2.00.
- 5 Stock price: $40 → FCF Yield = $2.00 ÷ $40 = 5%.
- 6 A 5% FCF yield can be compared directly to, say, a bond paying 4% interest, to judge which looks like the more attractive place to park money.
Quick Recap
- ✓ A company can show accounting profit (net income) while burning cash, or vice versa — FCF helps reconcile the two.
- ✓ FCF yield is often compared to a company's dividend yield or bond yields to judge relative attractiveness.