Free cash flow
Free cash flow is the cash a company generates from its business after paying for the investments needed to keep and grow it.
Free cash flow = Cash from operations − Capital expenditure
What it is
The cash flow statement shows cash from operations: the real cash the business brought in during the year. But a company also has to spend on new machines, factories, stores or software. That spending is capital expenditure, or capex.
What is left after capex is free cash flow. It is the money the company can use to pay dividends, repay debt, buy back shares or save, without borrowing.
How to read it
Positive free cash flow year after year is one of the strongest signs of a healthy business. It means profit is turning into real cash, and the business can fund itself.
Negative free cash flow is not automatically bad. A company building a big new plant may spend more than it earns for a few years. What matters is whether that spending later produces more cash. Negative free cash flow every year, with rising debt, is a warning.
Why it can differ from profit
Profit includes sales made on credit that may not have been collected yet. Free cash flow only counts money that actually came in. If customers are slow to pay or stock is piling up, profit can rise while free cash flow shrinks.
Look at free cash flow over several years. One year can swing a lot because of a big project or a timing difference.
Profit vs free cash flow
A company reports net profit of ₹120 crore. Its cash from operations is ₹150 crore and it spends ₹60 crore on new machinery. Free cash flow = ₹150 − ₹60 = ₹90 crore. Another company with the same ₹120 crore profit has cash from operations of only ₹40 crore and capex of ₹70 crore, so its free cash flow is −₹30 crore.
Common mistakes
- Judging a company on profit alone and never opening the cash flow statement.
- Panicking at one year of negative free cash flow during a planned expansion.
- Ignoring years of negative free cash flow funded by more and more debt.
Cash from operations is ₹200 crore and capex is ₹80 crore. What is free cash flow?
- ₹120 crore
- ₹280 crore
- ₹80 crore
Show the answer
₹120 crore. Free cash flow = cash from operations − capex = ₹200 − ₹80 = ₹120 crore.
Common questions
Is negative free cash flow bad?
Not always. Growing companies can spend more than they earn for a while. It becomes a concern when it lasts for years and is paid for with rising debt.
What is the difference between free cash flow and net profit?
Net profit follows accounting rules and includes sales not yet collected. Free cash flow is the actual cash left after running and investing in the business.
Where do I find free cash flow?
It is rarely printed directly. Take cash from operating activities from the cash flow statement and subtract purchase of fixed assets.
Practise reading company numbers, free
Short chapters, then real calls graded on your reasoning, not luck. No money involved.