In short: Free cash flow is the cash left after a company pays to run and maintain the business.
It is what can go to dividends, buybacks, debt payoff or growth. Our free cash flow calculator shows it from two numbers you can find in any annual report. Open the free cash flow calculator and follow along.
The free cash flow calculator formula
Free cash flow = operating cash flow minus capital expenditures. Free cash flow margin = free cash flow divided by revenue.
A worked example
Operating cash flow is $80 million and capital spending is $55 million. Free cash flow is $25 million. On $500 million in revenue, the margin is 5 percent. If the same company reported $60 million net income, you would ask why only $25 million became free cash.
How to read the result
Healthy companies tend to show positive and growing free cash flow over several years. Early stage companies often burn cash on purpose, so look at how long their cash will last. Cash runway matters more than the label.
Common mistakes to avoid
One heavy spending year can make free cash flow dip without a problem. Look at three to five years. Also check stock based pay, which does not use cash but does dilute you.
How to use the free cash flow calculator step by step
Start by opening the free cash flow calculator. Pull the numbers from the latest annual or quarterly report, which you can find free on the company site or at the SEC. Enter them, write down the result, and then run the same numbers for two or three similar companies. A single result means little. A comparison tells you a story. Keep your notes so you can see how your judgment improves over time.
Keep learning about free cash flow calculator
Read the full explainer on free cash flow or try the ROI calculator. Our calculator hub has every tool in one place, and the glossary explains any term you meet along the way.
Why free cash flow can differ from profit
Net income includes non cash items and accounting choices. Free cash flow follows actual money. A company can show a profit and still run short of cash if customers pay late, inventory piles up, or it spends heavily on equipment. The reverse can happen too. A company with a small profit can have strong cash flow if it collects quickly and has large non cash charges like depreciation.
Take the earlier company with $25 million in free cash flow and $60 million in net income. Part of that gap may be normal. Perhaps it is building a new plant this year, which raises capital spending now but should help later. Part might be worrying, such as sales booked but not yet collected. The way to tell is to read the cash flow statement and the notes in the annual report.
Looking at free cash flow per share and yield
Two helpful ways to scale the number. Free cash flow per share divides the total by the share count, so you can see it next to the price. Free cash flow yield divides it by market value. If a company has a market cap of $1 billion and produces $50 million of free cash flow, the yield is 5 percent. That tells you how much cash the business makes compared to its price. Compare it with similar firms, since normal levels vary by industry. The market cap calculator helps with the denominator.
Trends matter more than one year
A single year can mislead. Capital spending is lumpy. A company may spend little for years, then a lot at once. Look at five years if you can, and ask whether free cash flow is rising, flat or shrinking. Also check how the company uses it. Does it pay down debt, return money to owners, or fund growth that earns a decent return?
Things to watch for
- Cuts to maintenance spending that make free cash flow look better for a short time.
- Heavy use of stock pay, which saves cash but increases the share count.
- One time cash from selling assets, which is not repeatable.
Free cash flow for young and fast growing companies
Early stage companies often have negative free cash flow because they spend on growth first. That is not automatically bad. The key questions are how much cash they have left, how fast they are using it, and how much time that gives them. If a company burns $10 million a year and holds $40 million in cash, it has about four years of runway. Watch also whether it needs to raise new money, since selling new shares can reduce the value of your own share.
What to do next
Pick a company you know and pull operating cash flow and capital spending for the past three years from its annual reports at sec.gov. Enter them in the free cash flow calculator. Then compare with the P/E ratio calculator to see how earnings and cash tell different parts of the story. The guide to valuing a stock ties these measures together.
This is education only and not investment advice.
Questions people ask about free cash flow
Can a company have profit but negative free cash flow?
Yes. A growing company may spend heavily on equipment or buildings, or wait to be paid by customers. Profit can look healthy while cash goes out. That is why free cash flow is checked alongside earnings. Check official sources if unsure.
Is negative free cash flow always bad?
No. A company investing heavily in growth may show it for a while. What matters is the reason and whether the spending can pay off. Repeated negative years with rising debt deserve a closer look. Check official sources if unsure.
Where do I find the numbers?
Operating cash flow and capital expenditures are on the cash flow statement in the company’s annual and quarterly reports. Subtract capital spending from operating cash flow. Use the same period for both figures, and compare several years. Take your time.
Quick recap
Free cash flow is the cash left after a business pays to run and maintain itself. It can differ from profit, so check it over several years. Try your own figures in the calculators. Take your time and check official sources if unsure.
This is education, not investment advice. Do your own research and speak with a licensed professional before you act. Further reading: the SEC’s Investor.gov has free guides for new investors.
