free cash flow

Definition

Cash from operations minus capital expenditures—the actual money left over after keeping the business running that can be used for dividends, buybacks, or acquisitions. It's the ultimate 'show me the money' metric that cuts through accounting games.

Example Usage

Despite reporting profits, the company generated negative free cash flow due to massive infrastructure investments.

Origin

Term popularized in the 1980s as analysts sought metrics less susceptible to accounting manipulation

Fun Fact

Warren Buffett famously focuses on free cash flow over earnings, calling it 'owner earnings'—the actual cash an owner could extract from a business.

Source: Cash flow analysis and equity valuation

Related Terms

Beginner

Fiscal Year

A 12-month accounting period that doesn't have to match the calendar year, because apparently regular years weren't confusing enough. Companies pick fiscal years like kids pick team names, seemingly at random and with no regard for anyone else's convenience.

💰 Finance / Accounting

Advanced

credit default swap

An insurance contract against a borrower defaulting on debt, except it's called a 'swap' instead of insurance to avoid pesky insurance regulations. The financial instrument that nearly destroyed the global economy in 2008.

💰 Finance / Accounting

Beginner

accrued expenses

Costs incurred but not yet paid, recorded as liabilities on the balance sheet because accrual accounting insists on acknowledging unpleasant realities before the bills arrive. Financial statements' way of saying 'don't get too excited, you owe money.'

💰 Finance / Accounting

Advanced

notional value

The total value of a leveraged position's assets, as opposed to the actual cash you put up, which is usually much less. It's the difference between owning a $100,000 house and the $20,000 you put down.

💰 Finance / Accounting

Intermediate

net present value

The difference between the present value of cash inflows and outflows over time, discounted because a dollar today is worth more than a dollar tomorrow—thank you, inflation and opportunity cost. If it's positive, invest; if negative, run away.

💰 Finance / Accounting

Advanced

futures

Financial contracts obligating parties to buy or sell assets at predetermined future dates and prices, essentially allowing traders to bet on tomorrow's commodity prices today. These derivatives let farmers hedge against price drops and speculators gamble on market movements without ever touching an actual bushel of wheat. The futures market adds liquidity and price discovery to markets while giving financial news anchors something to dramatically discuss at market close.

💰 Finance / Accounting

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