Free Cash Flow (FCF) is a key financial metric that measures the amount of cash a company generates from its operations after accounting for capital expenditures (CapEx) required to maintain or expand its asset base. It represents the cash available to the company for debt repayment, dividend distribution, reinvestment, or other corporate activities. In simple terms, it shows how much real cash is left after the company funds its essential business needs.

The formula for calculating Free Cash Flow is:

FCF = Operating Cash Flow ñ Capital Expenditures

Unlike accounting profits, which can be influenced by non-cash items such as depreciation or amortization, FCF reflects the actual liquidity position of a company. Investors and analysts use this measure to determine how efficiently a business converts its profits into usable cash and whether it has the capacity to pursue growth or reward shareholders without raising additional funds.

A positive Free Cash Flow indicates that a company is generating more cash than it needs to sustain operations and capital investments, signifying financial health and stability. Conversely, a negative FCF may suggest heavy capital spending, declining operational efficiency, or cash flow constraintsóthough it is not always negative if the spending aims to fund future growth.

Free Cash Flow is a vital component in fundamental analysis, particularly for valuing businesses using models such as the Discounted Cash Flow (DCF) method. It also provides insights into dividend sustainability and debt-servicing ability.

In essence, Free Cash Flow helps investors evaluate a companyís true earning power and financial flexibility beyond reported profits, making it one of the most reliable indicators of long-term value creation.