Free cash flow represents the cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets. A common method for estimating this figure involves starting with earnings before interest, taxes, depreciation, and amortization (EBITDA). This approach acknowledges that EBITDA serves as a proxy for a company’s operating profitability before considering capital expenditures and changes in working capital. Adjustments to EBITDA are then made to arrive at a more accurate representation of available cash flow.
Understanding a company’s free cash flow is crucial for various stakeholders. It provides insight into the business’s ability to fund future growth, pay dividends, reduce debt, or make strategic acquisitions. Examining free cash flow trends over time can reveal a company’s financial health and its ability to generate sustainable returns. Historically, analyzing this metric has been a cornerstone of financial analysis, providing a clearer picture than net income alone.
