Free cash flow

Operating cash flow less capital expenditure - what is left after the business has funded both its trading and the assets it needs to keep running.

Example

Northgate's 225,000 of operating cash flow less 400,000 of equipment spending is negative 175,000.

Important

Where it is negative, read the financing section to find who filled the gap and ask whether that source will be available again next year on the same terms.

Related terms

  • Operating cash flow — The cash a business generated or consumed by running itself, usually presented as net profit adjusted for non-cash charges and for the movements in receivables, inventory and payables.
  • Capital expenditure — Money spent acquiring or improving long-lived assets such as buildings, machinery and equipment. Shown in the investing section of the cash flow statement rather than as a cost on the income statement.
  • Cash flow statement — The statement explaining how the bank balance moved over a period, split into cash from operating the business, cash spent on or received from long-term assets, and cash raised from or returned to lenders and owners.

Lessons that explain it

  • Appraising one company: the figures, and the growth already in the price — A practical pass over one listed business - what it earns, what it owes, what cash it keeps, and what the current price is already assuming. (14 min)
  • The cash flow statement: what actually moved — The statement that cannot be authored the way the other two can, because at the end of it there is a bank balance that either matches or does not. It is where a profitable year reveals whether it was also a solvent one. (12 min)
  • What the three say together — Each statement answers a question the others cannot, and the interesting information is almost always in the disagreements between them rather than in any single figure. (14 min)
  • The return is discretionary earnings, financed with debt the business itself has to service — Seller's discretionary earnings is a reconstructed number built from add-backs, and almost every small-business purchase is financed with debt the business's own cash flow is expected to repay - which makes the add-back schedule the single most consequential piece of arithmetic in the deal. (12 min)

All 578 terms in the Investing glossary