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Accounting

What is Free cash flow?

Cash generated by operations after capital expenditures — the cash actually available to repay debt, pay dividends, or reinvest.

Free cash flow (FCF) is the cash a business generates after paying for the capital expenditures needed to maintain or expand its operations. It's the most reliable measure of whether a business is actually generating cash, as opposed to just accounting profit.

How to calculate

Operating cash flow
- Capital expenditures (CapEx)
= Free cash flow

Or from the top:

Net income
+ Non-cash expenses (depreciation, amortization)
+ Changes in working capital
- Capital expenditures
= Free cash flow

Why it matters more than EBITDA

EBITDA can show "healthy" results for a business that is silently consuming cash on equipment replacement. FCF is what owners can actually withdraw, lenders can be repaid from, and acquirers will pay multiples of.

Watch for

  • CapEx that's actually maintenance — recorded as capital but really keeps the business running
  • Working capital traps — growing receivables can make a "profitable" business cash-poor
  • Lumpy CapEx years — average over 3 years to see trend

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