Free cash flow (FCF) is the cash left over after a company pays for capital expenditures needed to sustain or expand its asset base. It's the cash available to return to shareholders, pay down debt, or reinvest in growth.
Formula: FCF = Operating Cash Flow − Capital Expenditures
Why investors focus on FCF
Accounting earnings can be manipulated through depreciation schedules, revenue recognition timing, and accrual accounting. Cash flow is harder to fake. A company that earns $10M but has negative FCF may look profitable on paper while burning cash.
Free cash flow is the denominator in one of the most important valuation multiples: Price-to-FCF (P/FCF). A company trading at 20× FCF ($20 market cap per $1 of FCF) returns a 5% FCF yield — the cash generation rate you're paying for.
Where to find the inputs
Operating Cash Flow: In the cash flow statement under "Cash from Operations." This starts with net income and adds back non-cash charges (D&A) and adjusts for working capital changes.
Capital Expenditures (CapEx): In the cash flow statement under "Cash from Investing Activities," usually labelled "Purchases of property and equipment" or "Capital expenditures." Always a negative number (cash outflow).
For private companies, OCF = Net Income + Depreciation & Amortization − Increase in Working Capital.
FCF vs related metrics
| Metric | What it measures |
|---|---|
| Free Cash Flow | Cash after capex — available to owners |
| EBITDA | Proxy for operating cash flow before capex |
| Net Income | Accounting profit — includes non-cash items |
| Operating Cash Flow | Cash from operations before capex |
For SaaS companies, capex is typically low (servers, laptops), so EBITDA and FCF are similar. For capital-intensive businesses (manufacturing, real estate), FCF can be dramatically lower than EBITDA.
FCF benchmarks
High-quality SaaS companies generate 15–30% FCF margins at scale: - Veeva Systems: ~30% FCF margin - Shopify: ~25% FCF margin - HubSpot: ~18% FCF margin - Salesforce: ~25% FCF margin
Early-stage companies ($1M–$10M ARR) often have negative or near-zero FCF — this is expected if unit economics support the investment.
Calculate yours at the Free Cash Flow Calculator.