Level 6 · Financial Analysis
Free Cash Flow
The cash left over after keeping the lights on and the machines running.
In this lesson
What you'll be able to do
- Calculate free cash flow
- Separate maintenance from growth capex
- Explain why FCF matters to owners
- Interpret negative FCF correctly
Think about it
Which company would you rather own: one earning ₹100 crore profit and spending ₹120 crore on machinery every year, or one earning ₹60 crore and spending ₹10 crore?
Story
Let's picture it
A taxi driver earns ₹40,000 a month. But the car needs ₹12,000 of servicing, insurance and tyre replacement each month just to stay roadworthy. His real, spendable income is ₹28,000. Companies are the same: profit before capital spending is not money anyone can actually use.
Visual
From operating cash to free cash
- 1
Operating cash flow
Cash produced by the business
- 2
− Maintenance capex
Spending needed just to keep operating
- 3
− Growth capex
Spending to expand capacity
- 4
= Free cash flow
What's genuinely available to owners and lenders
- 5
Then judge
Negative FCF is fine if growth capex earns good returns
Plain English
The simple explanation
Free cash flow is operating cash flow minus capital expenditure. It is the cash a business could hand to its owners without shrinking itself.
Not all capex is equal. Maintenance capex keeps existing operations alive; growth capex builds new capacity. Companies rarely split them, so read the management discussion for clues.
Negative free cash flow is not automatically bad. A young company investing heavily may be building tomorrow's profit engine, but the test is whether returns on that capital eventually appear.
Real world
Reliance Jio
Building a nationwide 4G network required enormous capital expenditure, pushing free cash flow deeply negative for years. The investment case rested entirely on whether that spending would later produce sustained cash generation, exactly the judgement FCF analysis is designed to force.
Watch out
Common mistakes
- Treating all negative FCF as failure.
- Ignoring whether capex ever produced returns.
- Forgetting that FCF must eventually cover interest and dividends.
Did you know?
Many valuation models used by professional analysts value a company as the present value of its expected future free cash flows, not its profits.
Your turn
Mini challenge
Calculate free cash flow for one company for five years. Was it positive in at least three of them?
Quick quiz
1 / 5
Wrap up
Summary
Free cash flow is operating cash minus capital spending, the money genuinely available to owners. Negative FCF demands one question: did the spending eventually earn a return?
- FCF = CFO − capex
- Maintenance and growth capex mean different things
- Negative FCF needs context, not condemnation
- FCF underpins professional valuation
Revise