Free cash flow

Free cash flow is a pure measure of the cash a company has left once it has met all its operating obligations.

Free cash flow is a pure measure of the cash a company has left once it has met all its operating obligations. To get it, you subtract a firm's non-discretionary costs such as capital expenditure from its operating cash flow.

As a rule of thumb, a genuinely healthy company will tend to show positive free cash flow every year. It is free cash flow that allows a company to buy back shares, increase dividends, negotiate acquisitions, pay off debt and upgrade its equipment.

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The free cash flow yield is worked out by dividing free cash flow per share by market capitalisation and total debt. The resulting percentage is a useful way of comparing companies that operate in the same market. The higher the firm's free cash-flow yield, the better.

See Tim Bennett's video tutorial: Five ways companies can cook cash flow.

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