FCF
Free Cash Flow
The cash a company actually keeps after paying all operating costs and growth investments.
What it is
FCF (Free Cash Flow) is the difference between operating cash flow (OCF) and capital expenditures (CAPEX):
Unlike accounting profit, FCF is real cash — money the company has on hand to deploy freely. It can be returned to shareholders as dividends, used to buy back shares, repay debt, or fund acquisitions.
FCF margin expresses how many cents from every dollar of revenue convert into free cash. A margin above 20% is considered exceptional.
Why track it
A company can report high profits while generating negligible or negative FCF — for example due to aggressive CAPEX, poor receivables management, or unusual accounting items.
FCF is the investor's "true earnings." Dividends are paid from FCF, shares are bought back from FCF, debt is repaid from FCF. A 5-year FCF trend tells more about a company's health than any single quarterly figure.
Also track the FCF Conversion Ratio = FCF / Net Income. A value above 1 means the company generates more cash than the income statement implies — a strong signal of earnings quality.
Real-world example
Watch out for
FCF can be temporarily low even for an excellent company that is investing heavily (high CAPEX). Microsoft and Amazon both showed FCF below their historical averages during intense investment cycles — that was not a problem, but an opportunity.
Track the 3–5 year trend, not a single quarter.
Cash Burn (for unprofitable companies): For companies without positive FCF — typically early-stage, fast-growing businesses — instead of FCF margin, track cash burn: how much cash the company consumes each month/quarter (negative FCF). From that, calculate runway = cash on hand / monthly burn rate — how many months the company can operate before needing to raise more capital or reach profitability. A declining cash burn (improving trend) is a positive signal even for a company far from FCF-positive.