Cash from operations
Starts with net income, adds back non-cash charges like depreciation, and adjusts for working capital. Found on the cash-flow statement, line one. The raw cash engine of the business.
Definition
What is free cash flow?
Free cash flow is cash from operations minus capital expenditures. It is the cash a business actually produces for its owners after funding the assets needed to keep operating. FCF is harder to manipulate than reported earnings and is the input that drives intrinsic-value calculations.
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Short answer
Earnings can be smoothed by accruals, deferrals, and accounting choices. Free cash flow is what hits the bank account. Buffett: cash is a fact, earnings are an opinion. FCF funds the four things a business does with money: dividends, buybacks, debt paydown, and reinvestment.
The formula in three lines
Capital expenditures
Cash spent on property, plant, equipment, and other long-lived assets. Required to maintain or grow the business. Often abbreviated capex and subtracted to reach FCF.
Free cash flow
What is left after the business pays its bills and funds its assets. Available to owners for dividends, buybacks, debt repayment, or reinvestment in acquisitions.
A worked example
Apple generated roughly 119 billion dollars in cash from operations in its most recent fiscal year and spent about 11 billion dollars on capital expenditures. Free cash flow is 119 minus 11, or 108 billion dollars. That is the cash available to fund the dividend, the buyback programme, and any reinvestment after maintaining the asset base.
invest-like surfaces FCF inside the quality and valuation pillars; see /methodology/.
Related
- Buffett-Fit methodology - free cash flow is the cash-engine input behind the Buffett-Fit valuation pillar.
- Top Buffett-fit stocks today - the live ranking of US-listed stocks with sustained durable free cash flow under the Buffett rubric.
See FCF reasoning on a real verdict
Every Buffett-Fit verdict on invest-like reports FCF trends across the trailing five years.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.