Cash FlowFCF

What is Free Cash Flow (FCF)?

Free Cash Flow (FCF) is the cash a business generates from operations after deducting the capital expenditures required to maintain and grow the asset base. It is the cash available to pay down debt, return capital to shareholders, and fund acquisitions -- making it the most direct measure of a company's true earning power for investors.

Cite this page
ValueMarkers (2026). "Free Cash Flow Definition and Formula." Retrieved from https://valuemarkers.com/glossary/free-cash-flow

Formula

FCF = Operating Cash Flow - Capital Expenditures

Why Free Cash Flow Beats Earnings

Net income is subject to accounting choices -- depreciation schedules, revenue recognition timing, one-time items -- that can mask or inflate the true cash generation of a business. Free cash flow cuts through these distortions: cash either hits the bank account or it does not. This is why sophisticated investors focus on price-to-FCF multiples and FCF yield as primary valuation metrics rather than P/E ratios.

Capital-light businesses (software, financial services, consumer brands) tend to generate high FCF relative to net income because they require little ongoing reinvestment. Capital-intensive businesses (utilities, manufacturers, airlines) often show the reverse: high accounting earnings but low FCF after the heavy capex requirements are paid. Comparing FCF to net income -- the FCF conversion ratio -- reveals how much of reported earnings is real cash.

Calculate Owner Earnings

Owner Earnings refine FCF by adjusting capex to reflect true maintenance needs. Use our Owner Earnings Calculator for a more conservative cash-flow estimate.

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Frequently Asked Questions

What is free cash flow?+

Free cash flow is the cash a company produces from its core operations minus what it must spend on capital expenditures (property, plant, equipment, etc.) to maintain and grow the business. It is "free" because it is available to all capital providers -- debt holders, equity holders, and acquirers -- without restriction.

How do you calculate free cash flow?+

The simplest formula is FCF = Operating Cash Flow - Capital Expenditures. Both figures are found on the cash flow statement. A more precise version separates maintenance capex (keeping assets running) from growth capex (expanding capacity), since only maintenance capex is a true cost of sustaining the business.

What is the difference between FCF and owner earnings?+

Owner earnings, a term coined by Warren Buffett, approximate FCF but replace reported depreciation with a more realistic estimate of the capex needed to fully maintain competitive position. For capital-light businesses the two are similar; for capital-intensive ones, owner earnings often diverge significantly from GAAP-derived FCF.

What is a good free cash flow yield?+

Free cash flow yield = FCF / Market Cap. A yield above 5-6% is often considered attractive for a mature business, suggesting you are buying a dollar of annual free cash for $16 or less. Growth investors accept lower yields in exchange for expected FCF growth. Compare the yield to the current risk-free rate (e.g., 10-year Treasury) as a quick valuation sanity-check.