# Free Cash Flow > Free cash flow is cash left after running and investing in the business. Learn how to calculate FCF, FCF yield and conversion, and why investors value it highly. Source: https://learn.tradelabsai.com/fundamentals/free-cash-flow/ Track: Fundamental Analysis · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Free Cash Flow", https://learn.tradelabsai.com/fundamentals/free-cash-flow/ Free cash flow (FCF) is the cash a company generates from its operations after paying for the investments needed to maintain and grow the business. It is the money available to repay debt, pay dividends, buy back shares or make acquisitions. Many investors consider free cash flow the most honest measure of a company's financial performance, because it is harder to manipulate than accounting profit. It is also the foundation of discounted cash flow valuation. ## The basic formula ``` free cash flow = cash from operations - capital expenditures ``` Both figures come from the cash flow statement. See [Cash Flow Statement](https://learn.tradelabsai.com/fundamentals/cash-flow-statement/) and [Capex, Depreciation and Amortization](https://learn.tradelabsai.com/fundamentals/capex/). ## Variations | Measure | Formula | Use | |---|---|---| | Free cash flow (FCF) | Operating cash flow minus capex | Most common | | Free cash flow to equity (FCFE) | FCF minus debt repayments plus new borrowing | Cash available to shareholders | | Free cash flow to the firm (FCFF) | EBIT × (1 minus tax rate) + D&A minus capex minus change in working capital | Cash available to all capital providers; used in DCF | | FCF after stock compensation | FCF minus stock based compensation | Treats stock pay as a real cost | ## Worked example **Example: Calculating FCF and FCF yield** A company reports cash from operations of $900 million and capital expenditures of $300 million. Free cash flow is $600 million. It has 400 million shares at $50, a market cap of $20 billion. FCF yield = 600 / 20,000 = 3.0%. FCF per share = 600 / 400 = $1.50, so the price to FCF ratio is about 33. If stock based compensation is $150 million, FCF after stock compensation is $450 million and the yield falls to 2.25%. ## Free cash flow yield ``` FCF yield = free cash flow / market capitalisation ``` FCF yield is like an earnings yield based on cash. A higher yield can indicate a cheaper stock, though it depends on growth and risk. Investors compare FCF yields with bond yields and across companies. See [Valuation Basics](https://learn.tradelabsai.com/fundamentals/valuation-basics/). ## FCF conversion ``` FCF conversion = free cash flow / net income ``` Conversion near or above 100% suggests profits are backed by cash. Persistently low conversion can signal heavy reinvestment needs, working capital problems or aggressive accounting. See [Earnings Quality and Cash Conversion](https://learn.tradelabsai.com/fundamentals/earnings-quality/). ## Maintenance vs growth capex Not all capital spending is equal. Maintenance capex keeps existing operations running; growth capex expands capacity. A fast growing company may show low FCF because it is investing heavily for future returns, which is not necessarily bad. Analysts sometimes estimate "owner earnings" (a term popularised by Warren Buffett) using only maintenance capex. See [Capex, Depreciation and Amortization](https://learn.tradelabsai.com/fundamentals/capex/). ## What companies do with FCF | Use | Effect | Lesson | |---|---|---| | Reinvest in the business | Future growth | [Capital Allocation and Management](https://learn.tradelabsai.com/fundamentals/capital-allocation/) | | Pay dividends | Direct cash to shareholders | [Dividends](https://learn.tradelabsai.com/fundamentals/dividends/) | | Buy back shares | Reduce share count | [Buybacks](https://learn.tradelabsai.com/fundamentals/buybacks/) | | Repay debt | Lower risk and interest costs | | | Acquisitions | Buy growth, with integration risk | [Mergers and Acquisitions](https://learn.tradelabsai.com/fundamentals/mergers-and-acquisitions/) | ## Common pitfalls - **Ignoring stock based compensation,** which is real dilution. - **One off working capital boosts,** such as delaying payments to suppliers. - **Leases:** lease payments may sit in financing, inflating FCF. - **Cyclical peaks:** commodity companies can show huge FCF at the top of a cycle. - **Capitalising costs** to push spending out of operating cash flow. ## Free cash flow over a full cycle Because free cash flow can swing from year to year with working capital and investment timing, many analysts look at the average over several years, or over a full business cycle for cyclical companies. A single strong year is less informative than a consistent record of turning profit into cash. ## Frequently asked questions ### What is free cash flow? Cash from operations minus capital expenditures: the cash left after running and investing in the business. ### Why is free cash flow important? It shows the cash available for dividends, buybacks, debt repayment and acquisitions, and is harder to manipulate than net income. ### What is a good free cash flow yield? It depends on growth and risk, but yields well above government bond yields often indicate a stock may be inexpensive, while very low yields usually reflect high growth expectations. Next, learn how short term assets and liabilities affect cash in [Working Capital](https://learn.tradelabsai.com/fundamentals/working-capital/). ## Continue learning - Next lesson: [Working Capital](https://learn.tradelabsai.com/fundamentals/working-capital/) - Previous lesson: [Net Income and EPS](https://learn.tradelabsai.com/fundamentals/net-income-and-eps/) - Related: [Net Income and EPS](https://learn.tradelabsai.com/fundamentals/net-income-and-eps/): Net income is profit after all costs; EPS divides it by shares. Learn basic vs diluted EPS, GAAP vs adjusted EPS, buyback effects and how traders use EPS. - Related: [Cash Flow Statement](https://learn.tradelabsai.com/fundamentals/cash-flow-statement/): The cash flow statement shows where a company's cash came from and where it went. Learn the three sections, how to read them and why cash flow can reveal problems. - Related: [Capex, Depreciation and Amortization](https://learn.tradelabsai.com/fundamentals/capex/): Capital expenditures are spending on long term assets like factories and equipment. Learn maintenance vs growth capex, capex intensity and what capex signals. - Related: [DCF Valuation](https://learn.tradelabsai.com/fundamentals/dcf-valuation/): A DCF values a company by forecasting free cash flows and discounting them to today. Learn the steps, a worked example, sensitivity analysis and common mistakes. - Related: [Capital Allocation and Management](https://learn.tradelabsai.com/fundamentals/capital-allocation/): Capital allocation is how management spends a company's cash on reinvestment, deals, dividends, buybacks or debt. Learn how to judge good and bad decisions. - Related: [Earnings Quality and Cash Conversion](https://learn.tradelabsai.com/fundamentals/earnings-quality/): Earnings quality asks whether reported profits are real, repeatable and backed by cash. Learn accruals, warning signs, the Beneish model and famous frauds.