In short
Free cash flow is commonly defined as cash flow from operations minus capital expenditures: the cash a business generates that is available to repay debt, pay dividends or buy back shares.
Key takeaways
- Some analysts also subtract dividends, so check which definition a question uses.
- Persistent negative free cash flow can signal reliance on outside financing.
- It is a common input to discounted cash flow valuation.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company reports cash flow from operations of $850,000, capital expenditures of $300,000 and dividends paid of $100,000. Using the common definition (operating cash flow minus capital expenditures), what is free cash flow?