What Is Free Cash Flow?

A company can report a profit and still run out of money. So before you trust an earnings headline, check the cash.

Free cash flow (FCF) is the cash a business has left after paying its operating bills and funding the equipment it needs to keep running. It is the money truly available to pay down debt, buy back shares, pay dividends, or reinvest — without raising new financing. Reported profit ("net income") includes non-cash estimates and accounting choices; FCF strips most of those out.

The formula

There are two common definitions. Use the simple one unless you have a reason not to:

So: FCF = Operating cash flow − Capital expenditures.

Both inputs come straight off the cash flow statement, not the income statement. That matters, because the cash flow statement is harder to dress up than reported earnings.

Why it differs from profit

Net income runs through accrual accounting. Three things separate it from cash:

1. Non-cash charges. Depreciation and amortization reduce profit but move no cash. They get added back in operating cash flow.
2. Working capital. If customers owe you money (accounts receivable) or inventory is piling up, you booked the sale but haven't collected the cash. Profit looks fine; the bank balance doesn't move.
3. CapEx timing. A factory bought this year drains cash now but is expensed slowly over a decade. Profit barely notices; FCF takes the full hit.

A growing company often shows healthy profit and weak or negative FCF because it is pouring cash into receivables, inventory, and equipment. That can be fine — or a warning. FCF is how you tell.

A concrete example

Two companies each report \$100M in net income.

Same profit headline. But Company A converts earnings into \$90M of real cash, while Company B is burning \$10M to stand still. If you only read the income statement, the two look identical. The cash flow statement tells you they are not the same business at all.

Why it matters

• It funds everything you care about as an owner. Dividends, buybacks, and debt repayment are paid in cash, not in reported profit. No FCF, no durable returns to shareholders.
• It is harder to manipulate. Accruals leave more room for judgment; cash is cash. Persistent gaps where profit far exceeds FCF are a classic red flag worth a second look.
• It anchors valuation. Many valuation methods (including discounted cash flow) are built on projected free cash flow, not earnings.

One caution: a single year of FCF is noisy. A lumpy CapEx project or a one-time working-capital swing can distort it. Read three to five years together, and compare FCF to net income over the same span — if cash consistently trails profit, ask why.

Try this

Pull up the cash flow statement of one company you follow. Find operating cash flow and CapEx, subtract them, and compare the result to that year's net income. Do it for the last three years. If FCF tracks profit closely, the earnings are "cash-backed." If it doesn't, you've found your next research question.

Decision rule: trust earnings that show up as cash. When profit and free cash flow diverge for more than a year, treat the gap as the thing to explain before you invest.

Capture that three-year comparison as a note in JustJot.ai and link it to the company's other research — semantic search will surface it the next time you revisit the name, so your check compounds instead of starting over.