Investing: How Do Cash Flow and Free Cash Flow Differ?
How Do Cash Flow and Free Cash Flow Differ?
By Chris B Murphy
KEY TAKEAWAYS
- Cash flow and free cash flow are financial metrics that help determine a company’s liquidity.
- Positive cash flow indicates that a company’s liquid assets are increasing.
- Free cash flow is the remaining cash after a company has paid its operating expenses and capital expenditures.
Cash Flow
Cash flow is the net amount of cash and cash equivalents transferred into and out of a company. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, and pay expenses.
Cash flow is reported on the cash flow statement, which contains three sections detailing operating, investing, and financing activities.
Free Cash Flow
Free cash flow (FCF) is the cash a company produces through its operations after subtracting any outlays for investment in fixed assets like property, plant, and equipment. In other words, free cash flow or FCF is the cash left over after a company has paid its operating expenses and capital expenditure
Free cash flow is a company’s ability to generate cash above its operating and investing needs. Free cash flow reveals whether a company has enough, after funding operations and capital expenditures, to pay its creditors and equity investors through debt repayments, dividends, and share buybacks.
