<p>Free Cash Flow (FCF) is a measure of the cash a company generates from its core operations after subtracting the funds needed to maintain or expand its asset base. It represents the cash available to investors, creditors, and other stakeholders for activities such as paying dividends, repurchasing stock, or reducing debt. Because it strips out non‑cash accounting items and focuses on actual cash movements, FCF is a key indicator of financial health and sustainability.</p>

<h2>How It Works</h2>
<p>FCF is calculated by taking cash flow from operating activities (often reported on the statement of cash flows) and deducting capital expenditures (CapEx), which are the cash outlays for purchasing or upgrading property, plant, and equipment. The formula is:</p>
<ul>
<li><strong>Free Cash Flow = Operating Cash Flow – Capital Expenditures</strong></li>
</ul>
<p>Operating cash flow reflects the cash generated from day‑to‑day business activities, such as sales receipts minus payments to suppliers and employees. Capital expenditures represent the investment required to sustain or grow the company's productive capacity. By subtracting CapEx, the metric shows how much cash remains after the firm has reinvested in itself.</p>
<p>Analysts may also adjust FCF for changes in working capital or exclude certain non‑recurring items to obtain a “normalized” view, but the basic definition remains the same.</p>

<h2>Why It Matters</h2>
<p>FCF is widely used in valuation models, such as discounted cash flow (DCF) analysis, because it estimates the amount of cash that can be distributed to shareholders without jeopardizing the business’s operational integrity. A consistently positive FCF suggests that a company can fund growth, repay debt, and return capital to owners, which often translates into a stronger stock price.</p>
<p>For example, a retailer reports $500 million of operating cash flow and spends $150 million on new store openings and equipment upgrades. Its FCF of $350 million signals that, after maintaining its asset base, it has substantial cash left to pay dividends or buy back shares. Conversely, negative or volatile FCF may warn of excessive investment needs or weak cash generation, prompting investors to scrutinize the firm’s capital allocation strategy.</p>