Guide
What Is Free Cash Flow?
Published Sep 20, 2026
Free cash flow is the cash a company generates after paying to maintain and expand its operations; here is how to calculate it and why it can diverge from net income.
Free cash flow (FCF) is the cash a business generates from operations after the spending needed to maintain and grow its assets. It is what is left over to pay down debt, pay dividends, buy back shares, or make acquisitions.
The usual formula
Free cash flow = cash from operating activities - capital expenditures
Both numbers are on the cash flow statement. "Capital expenditures" (capex) is spending on equipment, buildings, data centers, software development that is capitalized, and similar long-lived assets. It usually appears in the investing section as "purchases of property and equipment."
Free cash flow is not defined by accounting rules, and companies sometimes define it differently, for example by also subtracting payments on leases. Check the definition in the filing.
Why it can differ from net income
Net income follows accounting rules that record revenue and costs when they are earned or incurred, not when cash moves. So the two can diverge:
- Depreciation lowers net income but is not a cash payment, which tends to lift cash flow above profit.
- Capex is not an expense in the period (it is spread over years as depreciation), but the cash leaves right away, which lowers free cash flow.
- Working capital matters: customers who pay late, or inventory that piles up, hold cash back even when sales are strong.
- Stock-based compensation reduces net income but takes no cash, so it flatters operating cash flow.
What to look for
- Free cash flow persistently below net income can mean profit is not turning into cash, for example through rising receivables or heavy capex.
- Free cash flow rising because capex was cut is not the same as stronger operations. Cutting investment can help one year and hurt later ones.
- Free cash flow margin (FCF divided by revenue) makes companies of different sizes comparable.
In a quarterly report
The cash flow statement in a 10-Q is usually year to date, not for the quarter alone. To get a single quarter, subtract the prior period's year-to-date figure. See how to read a 10-Q.
For information only; not investment advice. Methodology