Lexicon
Free Cash Flow
The cash a business actually has left over, after keeping the lights on and the machines running.
Free cash flow is the cash a company generates from its normal operations, minus the capital expenditures it needs to maintain and grow its physical assets — the money genuinely left over to pay dividends, buy back stock, pay down debt, or reinvest, with no further obligations attached.
The calculation is straightforward: operating cash flow minus capital expenditures. A company that generates $200 million in cash from operations and spends $50 million on new equipment and facilities has $150 million in free cash flow. That figure is what's actually available for the company to do with as it chooses, after the business has spent what it needs to spend just to keep functioning.
Why it's often preferred to net income
Net income, the profit figure at the bottom of an income statement, includes non-cash accounting items — depreciation, amortization, and various one-time adjustments — that can make a company look more or less profitable than the actual cash moving through it. Free cash flow strips a lot of that noise out. A company can report solid net income while spending heavily on new plants and equipment year after year, leaving very little cash actually free once that spending is accounted for.
The misunderstanding to watch for
A profitable-looking company on the income statement can still show weak or negative free cash flow if it's investing aggressively — that isn't automatically a red flag, since heavy investment can be exactly what a growing business should be doing. The distinction matters because it's easy to read "profitable" and assume "cash-rich" are the same statement, when they can point in opposite directions for a company in a heavy investment phase.