Free cash flow
Cash generated net of capital investment.
Free cash flow (FCF) is the cash remaining after a company has paid all operating expenses and invested in fixed capital (capex: equipment, facilities, capitalized software and R&D). It is often considered the most 'honest' number in corporate finance — more so than accounting net income, which can be distorted by non-cash items such as depreciation, write-downs, and provisions.
Net income answers the question 'how much did the company earn under accounting principles?' Free cash flow answers 'how much real cash entered the treasury after keeping the business running?' The two numbers can diverge substantially: Amazon during its high-growth years reported modest net income but rising FCF; conversely, companies in a divestment phase can show high earnings alongside disappointing FCF.
Worked example
Apple in fiscal year 2025 (ended September 2025) reported: Cash from Operations $123 billion, Capex $11 billion. Free Cash Flow = 123 − 11 = $112 billion. For comparison, net income for the same period was $97 billion. The $15 billion gap is driven primarily by non-cash depreciation and working capital movements.
Apple's FCF Yield (FCF / Market Cap) at that point was 112 / 4,500 = 2.5%. For context, the U.S. 10-year Treasury yielded 4.3%: Apple shareholders received a lower 'yield' in exchange for expected future growth. Running the same calculation on Coca-Cola yielded an FCF Yield of 4.1% — closer to the bond yield, reflecting a stable business with modest growth expectations.
When it's used
FCF serves four purposes. First, assessing dividend sustainability: a company can only pay dividends from cash, not from accounting earnings. If dividends structurally exceed FCF, a dividend trap may be forming. Second, calculating FCF Yield, an alternative valuation multiple to P/E (FCF Yield = FCF / Market Cap). Third, building a DCF (discounted cash flow) model, the standard fundamental valuation framework. Fourth, distinguishing companies that 'generate cash' from companies that 'generate accounting earnings' — a crucial distinction for value-oriented investors.
Limits
FCF can be temporarily inflated by deferring necessary investment: a company that cuts capex for a year shows higher FCF while degrading its future competitive capacity. FCF is also seasonal: retail companies peak in Q4 (holiday season), agricultural companies have annual cycles. Comparing a single quarter's FCF against the prior quarter is less informative than comparing it against the same quarter a year earlier.
Frequently asked
What is the difference between FCF and EBITDA?
EBITDA = earnings before interest, taxes, depreciation, and amortization. It is a proxy for operating cash but does NOT subtract capex. FCF subtracts capex from EBITDA (simplifying). FCF is more realistic for capital-intensive industries (industrials, telecoms); EBITDA is preferred for software/SaaS where capex is minimal.
How much FCF is 'enough'?
There is no absolute target. Mature businesses (Coca-Cola, P&G) typically convert 15–25% of revenue to FCF. Growth companies (Amazon, Netflix in early phases) can run negative FCF for years while reinvesting everything. What matters most is the trend: multi-year FCF growth signals a healthy business.
Can FCF replace EPS?
They are complementary, not interchangeable. Serious analysts track both: EPS because it is the number that moves markets in the short term, FCF because it reflects the business's long-term reality. Persistent divergence — EPS growing while FCF stagnates — is an accounting red flag.
Related terms
Educational definition. Not financial advice.