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Finance GlossaryFree Cash Flow
Free Cash Flow
Definition of Free Cash Flow
In accounting and earnings reports, free cash flow refers to the amount of money a company has after paying its maintenance expenses, salaries, utility expenses, and other operating expenses as well as capital expenditures.
The formula to calculate free cash flow: Operating Cash Flow − Capital Expenditures
Free cash flow is an important metric, especially for investors because it is a direct indicator of the financial competence of a company. For example, the amount of FCF a company has can decide whether it has enough cash to offer dividends, expand business, buy back shares, etc.
The formula to calculate free cash flow: Operating Cash Flow − Capital Expenditures
Free cash flow is an important metric, especially for investors because it is a direct indicator of the financial competence of a company. For example, the amount of FCF a company has can decide whether it has enough cash to offer dividends, expand business, buy back shares, etc.
Related Terms
Value Investing
Value investing is an investment strategy focused on buying securities that appear undervalued relative to their fundamentals. Investors look for stocks trading below intrinsic value due to temporary issues, such as short-term earnings decline, expecting that prices will rise once the market corrects its mispricing.
Liquidity Ratio
The Liquidity Ratio is a tool in financial analysis for measuring a company’s ability to fulfil short-term debt obligations without the need to secure external financing. The key term here is liquidity.
Insider Trading
Insider trading refers to the often illegal act of trading shares based on information that is not publicly available, typically obtained through dubious sources.
This privileged access to confidential information is termed “insider trading” because information is generally sourced through insiders or employees working at a publicly traded firm.
This privileged access to confidential information is termed “insider trading” because information is generally sourced through insiders or employees working at a publicly traded firm.
Cash Flow
The cash flow describes the amount of money that moves in or out of a company or an individual’s pocket. Cash flow can be of two types:
- Positive cash flow: more money earned than spent
-
Negative cash flow: more money spent than earned
Cash flow is an important metric in finance because it helps calculate metrics like liquidity, cash conversion ratio, and others along with giving a broad overview of a company’s financial health.
Record Date
The Record Date is the specific cutoff date set by a company to determine eligible shareholders for dividends, bonuses, stock splits, or rights issues. Investors must hold shares by the end of this date to qualify, even if the actual payout or entitlement occurs later. It ensures accurate distribution and is critical for retail investors to check before corporate actions.
Common Stocks
A common stock is a type of share that gives the holder the right to a part of a company’s profits, voting on key policies and decisions. Common stockholders have an advantage over preferred stockholders because they can:
- Get higher returns
- A part of the assets left after a company is liquidated (in case of default)
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