Free cash flow is the cash a company generates from its operations minus the cash it spends on capital investments to maintain and grow the business. It represents the cash available to shareholders and creditors after the company invests in itself. A company with strong free cash flow can pay dividends, buy back shares, or reduce debt.
A company generates $500 million in operating cash flow but spends $150 million on factories, equipment, and other capital investments. Its free cash flow is $500 million minus $150 million, which equals $350 million. This $350 million is available for investors and lenders, whereas the full $500 million operating cash flow includes money that must be reinvested.
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