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.

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.

Recommended

Margin call
Glossary

Margin call

When an investor borrows to bet on markets, they put down a deposit known as “margin”.
2 Apr 2021
Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020

Most Popular

How will Joe Biden’s capital gains tax rise affect crypto prices?
Bitcoin & crypto

How will Joe Biden’s capital gains tax rise affect crypto prices?

The US president wants to increase capital gains tax – and that’s going to hit a lot of American cryptocurrency speculators. Saloni Sardana looks at h…
14 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021
Are we nearing the end of the negative bond yield era?
Government bonds

Are we nearing the end of the negative bond yield era?

As inflation gets going, the era of the negative bond yield – that investors have to pay governments for the privilege of lending them money – might b…
14 May 2021