What is free cash flow?

Free cash flow: The money left after a company has paid its costs and investments. Profit is an accounting figure, cash flow is real money.

Free cash flow is the real money a company has left. You take the cash coming in from normal business and subtract investments in things like machines and buildings.

Profit is an accounting figure and can look good while little cash comes in. Cash flow shows whether real money actually reaches the bank.

With free cash flow a company can pay off debt, pay dividends or buy back its own shares. A company without free cash flow for years often has to borrow.

Example
In one year a company takes in 80 million euros from its normal business. It invests 30 million euros in new factories. Free cash flow is 80 minus 30, which is 50 million euros.

Watch out
One year of low free cash flow need not be a bad sign, for example after a big investment. Looking at several years gives a better picture.

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