Free cash flow
Free cash flow measures a firm's
cash flow remaining after all expenditures required to maintain or expand the business have been paid off. It represents the net cash produced by a firm during a given period on behalf of shareholders. Free cash flow is often calculated as
operating cash flow minus
capital expenditures plus the change in net working capital.
Free cash flow is significant because it represents the cash that is available for distribution to the company's shareholders or bondholders, if positive, or the cash that the shareholders or bondholders must inject to finance the business, if negative.
Some investors prefer using free cash flow instead of
net income to measure a company's financial performance, because free cash flow is more difficult to manipulate than net income. According to the
discounted cash flow valuation model, the
intrinsic value of a company is the
present value of all future free cash flows.
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Free Cash Flow*
Joy of Free Cash Flow, The Motley Fool, February 28, 2002
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What is Free Cash Flow?, Morningstar
