Free Cash Flow analysis aims to determine the amount of discretionary cash flow a business will have to purchase additional assets, retire debt, add to its liquidity to meet future cash outflow obligations or make cash distributions to ownership.
Overview
Free Cash Flow represents the cash balance of a business after deducting tax and capital expenditures from Operating Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) as opposed to cash flows in and out from operating activities.
Business is extremely hard to conduct without Free Cash Flow. Negative Free Cash Flow can mean that a company is making substantial investments for future returns. The problem is free cash flow represents the cash available today for the business to repay creditors or pay dividends to investors. Absent free cash flow and those who expect to get paid will not get paid. Failure to pay the people you owe money to will lead to a failed business.