free cash flow

The amount of cash that remains after deducting the funds that a company has to spend to fund its current operations. Often dividends are included; while they don’t have to be paid, not paying them will be a significantly negative event for shareholders. This is a favorite financial measurement of companies that have high overhead as a routine part of their business. The free cash flow calculation assumes that the company must pay for financing and business activities before it can use its cash for other purposes.

To arrive at free cash flow, take net cash flow from operating activities and subtract dividends and purchases of plant assets and add in sales of plant and equipment assets.