Free cash flow is operating cash flow minus capital expenditures.
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Subtract capital expenditures from operating cash flow. A company with $500,000 in cash from operations that spends $150,000 on equipment and other capital investments during the same period has $350,000 in free cash flow. Both figures come straight off the cash flow statement: operating cash flow from the top section, capital expenditures from the investing activities section.
Free cash flow strips out the accounting adjustments that shape net income, like depreciation and non-cash charges, and shows the cash a business actually has left over after paying to maintain and grow its asset base.
Net income can look healthy while a company is quietly burning cash, for example when profit is tied up in growing receivables or inventory rather than sitting in the bank. Free cash flow cuts through that by measuring actual cash generated after the reinvestment a business needs just to keep running.
A useful companion figure is FCF conversion, free cash flow as a percentage of operating cash flow, which shows how much of that operating cash actually survives after capital spending. A business with consistently strong FCF conversion has more flexibility to pay down debt, return cash to owners, or fund growth without external financing.
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