Free cash flow: what is left for the owner

Of all the figures in a set of accounts, free cash flow comes closest to the everyday meaning of earning.

How it is calculated

Operating cash flow minus capital expenditure.

-410 000 000 000

The meaning: how much money remains after the business has provided for its own functioning.

Why it matters more than profit

Dividends are paid out of free cash flow, debt is repaid from it and shares are bought back with it. Profit cannot do any of that — it is an accounting figure.

The capex trap

A company can improve free cash flow by cutting investment in maintaining its capacity. The figure rises while the business starts wearing out — an effect that surfaces years later.

Hence the need to look at capital expenditure over time rather than at a single total.

The link to valuation

In theory the value of a business equals the discounted sum of its future free cash flows — Price and value: how a market quote differs from what a business is worth.

Multiples built on it are more robust than those built on profit, because cash flow is harder to flatter — Earnings quality: how much cash is in the profit.

For dividend securities

A payout persistently exceeding free cash flow is funded by debt or by asset sales. That does not continue for long — A dividend strategy: income instead of growth.