Definitions Free Cash Flow

Free Cash Flow = Cash Flow From Operations - Capital Expenditures

Free Cash Flow is the money left after investment that a company can either put in the bank or give to shareholders in the form of a dividend.

Even if Profit is small, Depreciation can deliver a Cash Flow From Operations. However, you never actually write a check for Depreciation. The money is sitting in the Cash account like a check that has not been cashed. It follows that Free Cash Flow must subtract Capital Expenditures, the investments in plant and equipment.

If it turns out that you are plowing money back into plant at the same rate you are depreciating it, the whole business reduces back to profits. If the result is a positive number, then the company is creating wealth. The Free Cash Flow can be used to pay dividends, repurchase stock, or reinvest in the company, any of which delights Owners. If negative, then the company needs to consume somebody's wealth, and there are only three places to get it — working capital (our own wealth), a new stock issue (Owner's wealth), or more debt (Lender's wealth).