Why is free cash flow better than profit?

Reported profit includes non-cash items and accounting choices. Free cash flow is real cash, so it is harder to manipulate and shows whether the business actually generates money it can pay out or reinvest.

Can free cash flow be negative?

Yes. A young or fast-growing company may spend more on capex than it generates. That can be healthy if the investment pays off — but persistent negative FCF is a warning sign.

Glossary term

Free cash flow

Free cash flow is the cash a company has left from operations after paying for the capital investments needed to maintain and grow the business. It is the cash truly available to owners and creditors.

Formula Operating cash flow − Capital expenditure (capex)

Free cash flow (FCF) is the number many professional investors trust above all others. It is the cash a business actually generates once it has paid for the equipment, property and projects it needs to keep running and growing.

How to calculate free cash flow

Take operating cash flow (from the cash flow statement) and subtract capital expenditure:

If a company generates €300m of operating cash flow and spends €90m on capex, its free cash flow is €210m.

Why investors care

Profit can be shaped by accounting decisions; cash is cash. Free cash flow shows whether a company can:

pay dividends,
buy back shares,
pay down debt,
or reinvest to grow — all without borrowing.

A business with consistently rising free cash flow has real financial strength. One that reports profits but never converts them to cash deserves a hard look.

FCF and valuation

Because FCF is the cash available to investors, it sits at the heart of a discounted cash flow (DCF) valuation — the method of estimating what a company is worth from the cash it will generate in the future.