Profit is partly a matter of judgement; cash is not. Free cash flow (FCF) is the money genuinely left over after paying for operations and the investment the business needs. It is what funds dividends, buybacks, acquisitions and debt repayment.
Why FCF is more honest than profit
Net profit includes non-cash items (depreciation, provisions) and leaves accountants room for judgement. Cash received, by contrast, is a fact. Many accounting frauds have been detected through a lasting gap between reported profit and cash generated.
The warning sign
A company reporting rising profits but negative or falling FCF over several years deserves a thorough investigation. Cash always ends up telling the truth.
A caveat for fast-growing companies
Negative FCF is not always bad: a young company investing heavily to grow can legitimately burn cash. What matters is the trajectory and the reason. Burning cash to build a lasting asset is an investment; burning it to offset operating losses is a problem.
FCF yield
An FCF yield of 6% means the company generates €6 of available cash for every €100 of valuation.
In Earnnest
FCF and cash quality (FCF against net profit) feed into the /10 fundamental score in the Fundamentals tab.
À retenir
- ✓FCF is the cash genuinely available after investment: the hardest figure to dress up.
- ✓Profit rising without cash following is a major warning sign.
- ✓Negative FCF is judged on the reason and the trajectory, not on the sign alone.