Free Cash Flow (FCF) is the cash a business generates from operations after spending what is needed to maintain or expand its asset base. It is the cash genuinely available to repay debt, pay dividends, or buy back shares.
Formula: FCF = Operating Cash Flow - Capital Expenditure (Capex). Some analysts also subtract acquisition spend (FCF to Firm vs FCF to Equity).
Example: ITC reports OCF of Rs 18,000 cr and capex of Rs 3,000 cr — FCF = Rs 15,000 cr. That cash funded the Rs 13,000 cr dividend payout with Rs 2,000 cr to spare.
When to use: Quality-of-earnings cross-check. PAT can be massaged via accruals; FCF cannot easily be faked over multi-year windows. Compare 5-year cumulative FCF to 5-year cumulative PAT — a ratio close to 1 signals clean accounting.
When NOT to use: High-growth companies in heavy investment phase will show negative FCF for years — that is healthy if ROCE on new capex is high. Use with discretion.
Caveat: Past performance is not indicative of future returns. FCF can swing sharply with working-capital cycles.
Related terms: OCF, DCF (Discounted Cash Flow), Working Capital.