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Free Cash Flow: Why It Matters More Than Net Income

Beginner Investing • 5 min

What this lesson is about

Net income can be shaped by accounting choices. Actual cash is much harder to fake.

2 parts · a quick check after each · then the quiz

Part 1 of 2

Net income can be influenced by accounting choices, unlike real cash. Free Cash Flow (FCF) gives you a clearer picture. It’s the cash left after a company covers its running and growth costs, known as capital expenditures. The formula? Cash flow from operations minus capital expenditures.

A company might show profits on paper but still be draining cash. Or it could be the other way around. FCF reveals which scenario is true.

How long the cash lastsMoney in, money out, and the month the account is empty.

Quick check

What is Free Cash Flow, in simple terms?

Part 2 of 2

Insider Angle: This is why FCF is crucial in DCF valuation models. Experienced investors often check it before trusting reported earnings. It’s much harder to manipulate than net income.
Try This: Look up a company's cash flow statement. Find 'cash flow from operations' and 'capital expenditures.' Calculate Free Cash Flow and compare it to the reported net income for that period.

Quick check

What's a common formula for calculating Free Cash Flow?

Quiz

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