Free cash flow (FCF), explained
Free cash flow is the cash a business actually has left after keeping the lights on and reinvesting — and it’s much harder to massage than reported profit. Here’s how to read it.
What it is
Free cash flow is the cash a business has left after paying its running costs and reinvesting in itself. It's the money genuinely available to reward shareholders — through dividends and buybacks — or to pay down debt and make acquisitions. If profit is the accountant's verdict, free cash flow is the bank balance.
The formula
Worked example
A company generates £300m of cash from operations and spends £100m maintaining and growing its asset base:
That £200m is real, spendable cash — the kind that pays dividends without the company borrowing to do so.
Why it matters more than profit
Reported profit includes non-cash items (like depreciation) and is shaped by accounting choices. Cash is far harder to massage. A company can report a healthy profit while quietly burning through cash — and over time, the cash is what's real. Watching free cash flow is one of the best defences against businesses that look profitable on paper but aren't.
FCF yield — a valuation lens
Divide free cash flow by the company's market value and you get the free cash flow yield — how much cash the business throws off relative to its price. A higher yield can flag a cheaper, cash-generative company.
Free cash flow does double duty in Oak Growth: it feeds the Financials pillar, and it's the cash we forecast and discount to estimate intrinsic value.
Put this into practice — open the screener →