Free Cash Flow (FCF)

What it is\nOperating cash flow minus capital expenditures. Whatever's left is "free" — available to return to shareholders (dividends, buybacks), pay down debt, or fund acquisitions.\n\n## Why it matters more than reported earnings\nNet income includes a lot of accounting estimates: depreciation schedules, deferred tax provisions, stock-based comp accrual, working capital changes. Free cash flow is what actually hit (or left) the company's bank account.\n\nA business reporting "$1B of net income" but generating "$200M of free cash flow" is hiding a problem. Either it's capitalising aggressively, accruing earnings it hasn't collected, or systematically under-reporting capex.\n\n## How to use it\n- FCF / Net Income ratio: should be ≥ 80%. Lower = earnings quality concern.\n- FCF Yield = Free Cash Flow / Market Cap. Compare to risk-free rate. > 5% is genuinely cheap.\n- 5-year FCF growth: the cleanest growth signal — capital-light businesses can compound FCF faster than revenue\n\n## Pitfalls\n- Stock-based compensation is a real cost but doesn't reduce FCF. Subtract SBC manually for true "owner" cash flow.\n- Cyclical businesses have FCF that swings wildly year-to-year. Use 5-year average.