Free cash flow

Free cash flow is the cash a business produces from operations after paying for the capital expenditures needed to maintain and grow its productive asset base. It is the headline cash-flow figure on most equity research dashboards and the most-cited proxy for the cash a business generates that is genuinely available for buybacks, dividends, debt repayment, or acquisitions. FCF's strength is that it bridges the gap between accounting earnings and economic reality: it captures the working-capital and capex effects that net income hides. Its weakness is that the standard definition lumps maintenance capex with growth capex, which conflates two very different categories of spend. A heavy-investment phase distorts FCF downward without telling you anything bad about underlying economics, while a harvest phase inflates FCF without telling you anything good about the future. For high-quality reports we separate maintenance from growth capex (often by splitting capex roughly proportionally with depreciation as a baseline) and quote both reported FCF and an estimate of steady-state owner earnings. FCF should also be cross-checked against accruals: a divergence between net income and FCF that persists for multiple years is a quality red flag that triggers our accounting-quality gate.