Free Cash Flow

Concept

Free Cash Flow (FCF) is the cash a company generates after funding its operations and maintaining its asset base. It represents the actual cash available to distribute to all capital providers—debt holders and equity holders—without compromising the business. Think of it as the cash left over after a company pays its bills and invests enough to keep the lights on.

Intuition

Why FCF matters: It's the only metric that shows what cash is actually available to investors after the company has done everything it needs to sustain itself.

• Net income is polluted by non-cash charges, accounting elections, and interest expense specific to capital structure.
• EBITDA ignores the very real cash demands of CapEx and working capital.
• FCF answers the question: "If I bought this entire company today—debt and equity—how much cash could I pull out each year without destroying the business?"

This is why DCF valuations discount FCF, not earnings. Cash is what ultimately gets distributed to investors.

FCF is optionality. Once generated, management chooses the weapon:

Components

Interview Script

Free Cash Flow is the cash a company generates after funding its operations and maintaining its asset base—it's what's actually available to distribute to all capital providers without compromising the business. Unlike net income, which is polluted by non-cash charges and accounting elections, or EBITDA, which ignores CapEx and working capital needs, FCF tells you how much cash you could pull out each year without destroying the business. That's why DCF valuations discount FCF, not earnings—cash is what ultimately gets distributed to investors.