Free cash flow
ValuationDefinition
Cash from operations minus capital expenditures. The cash available to pay debt holders, equity holders, and reinvest in the business — what owners can actually take home or compound. Most rigorous proxy for true earnings.
Two flavors: FCF to firm (FCFF, used in DCF before financing) and FCF to equity (FCFE, after debt service). High-quality companies grow FCF faster than reported earnings (Microsoft, Visa). Low-quality ones report earnings but have weak FCF (large working capital needs, capex-heavy industrials).
Two flavors: FCF to firm (FCFF, used in DCF before financing) and FCF to equity (FCFE, after debt service). High-quality companies grow FCF faster than reported earnings (Microsoft, Visa). Low-quality ones report earnings but have weak FCF (large working capital needs, capex-heavy industrials).
Formula
FCF = Cash from operations − CapEx
Example
Berkshire Hathaway operating subsidiaries generated $43B of free cash flow in 2023 — funding Warren Buffett's acquisition firepower without diluting Berkshire shareholders.
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