Glossary · Valuation · Beginner-friendly
Free cash flow
In plain English
Free cash flow is the cash a business has left after paying to run and maintain itself. It’s a reality check on whether reported profits feel “real.”
Everyday analogy: What’s left in your wallet after rent, food, and keeping the car running.
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Why it matters
Free cash flow is the reality check on earnings - dividends, buybacks, and debt paydowns need cash eventually.
A bit more detail (optional)
Why cash matters
Earnings can be boosted by accounting choices. Cash flow is harder to fake for long. Dividends, buybacks, and debt paydown ultimately need cash.
Growth caveat
High-growth firms may show weak free cash flow while investing heavily. That can be fine - until the investments stop converting.
Simple examples
EPS up, FCF flat
Rising EPS with stalled free cash flow invites questions about working capital, capex, or earnings quality.
Quality screen
EPS rises three quarters in a row while FCF stalls on inventory builds - a prompt to dig into earnings quality.
Easy mistakes to avoid
- Celebrating EPS while FCF deteriorates
- Treating growth-capex weakness as always bad
- Ignoring working-capital swings that distort a single quarter
Remember: Let cash confirm (or challenge) the earnings story.