Using Free Cash Flow
Free cash flow (FCF) is the cash a business generates after paying for operating costs and necessary investments.
Why Investors Like FCF
- Harder to manipulate than earnings
- Funds buybacks, dividends, debt repayment, and growth
Quality of FCF
Ask:
- Is operating cash flow supported by real demand?
- Is capex stable and explainable?
- Are working-capital swings driving the number?
What Management Can Do With FCF
- Reinvest (new products, capacity, R&D)
- Buy back shares (reduces share count)
- Pay dividends
- Pay down debt
- Acquire other businesses
A Helpful Comparison
Compare FCF to net income. If net income is strong but FCF is weak, dig into capex and working capital.
Summary
FCF matters because it’s the fuel for long-term compounding and shareholder returns.