The amount of cash that is generated after an entity covers all capital expenditures (CapEx) and operating expenses, OpEx, during a particular period. In other words, it represents the cash that an entity generates after covering its outflows to support operations and maintain its capital base.

There are three ways to calculate free cash flows: using operating cash flow, sales revenue, or net operating profits.

Free cash flow (FCF) are calculated using the following formula:

FCF = operating cash flow – capital expenses

Where operating cash flow reflects net operating profit after taxes.

Free cash flow can reveal important insights into the condition of an entity, particularly its ability to pay down its debt, distribute profits, and internally finance growth opportunities.

As a financial measure, FCF helps an entity identify specific issues in its fundamentals before such issues arise on its income statement.