What is Free Cash Flow? In Free Cash Flow We Trust

Free cash flow is the cash a company generates through its operations, once you take off the non-cash expenses, changes in working capital, and capital expenditures. Thus this is the cash “free” to distribution that a company can potentially invest back into the growth of the business.



DefinitionFree Cash Flow (FCF) is a financial metric that represents the amount of cash generated by a company’s operations after accounting for capital expenditures (CapEx) needed to maintain or expand its asset base. It reflects the cash available to the company for debt repayment, distribution to shareholders, investment in growth opportunities, or other strategic uses. FCF is a crucial measure of a company’s financial health and its ability to create value for shareholders.
CalculationFCF is calculated using the following formula:
FCF = Operating Cash Flow – Capital ExpendituresOperating Cash Flow (OCF) represents the cash generated from a company’s core operating activities, such as sales, production, and services. It can be found in the company’s cash flow statement. Capital Expenditures (CapEx) include investments in property, plant, equipment, and other assets necessary for the business’s ongoing operations and growth. CapEx can also be found in the company’s financial statements.
ImportanceFCF is a critical financial metric because it measures the company’s ability to generate cash beyond its immediate operational needs. It provides insights into the company’s financial stability, growth prospects, and capacity to reward shareholders. A positive FCF indicates that the company has excess cash after funding essential operations and investments, which can be used for debt reduction, dividend payments, share buybacks, or strategic acquisitions.
Uses of FCFDebt Repayment: FCF can be used to pay down debt, reducing interest expenses and improving the company’s creditworthiness.
Shareholder Returns: Companies may use FCF to pay dividends to shareholders or repurchase their own shares, increasing shareholder value.
Investment in Growth: FCF can fund new projects, acquisitions, research and development, and other growth initiatives.
Financial Flexibility: Maintaining a positive FCF position enhances financial flexibility, enabling the company to navigate economic downturns or seize investment opportunities.
Valuation: FCF is a key factor in valuation models and helps determine a company’s intrinsic value.
Negative FCFA negative FCF indicates that a company is not generating enough cash from its core operations to cover its capital expenditures. While occasional negative FCF may occur during periods of heavy investment in growth, persistent negative FCF can be a cause for concern, as it may lead to liquidity issues, increased debt, or the need for external financing. Analyzing the reasons behind negative FCF is crucial for assessing a company’s financial health.
InterpretationHigh and consistent positive FCF is generally seen as a sign of financial strength and effective management. However, the significance of FCF can vary by industry and business model. – Comparing FCF to other financial metrics and industry benchmarks can provide a more comprehensive understanding of a company’s performance and financial health. – FCF analysis is often used by investors, analysts, and financial professionals to make informed investment decisions and assess a company’s ability to create shareholder value.



In free cash flow, we trust

When you look at the financials of tech companies, be it Tesla, Amazon or any other so-called unicorn startups or tech company an interesting aspect is how bad they perform if you measure them in terms of the bottom line.

Indeed, when you look at revenue growth, many of those companies seem to be doing fine. Yet when you look at the net profit (the money left after you deduct all the expenses from operating the business plus tax and interests), you are left with nothing, if not a net loss.

Does it mean those tech companies are worth nothing if they are not able to have a net profit? Not necessarily but of course the bottom line is still an important metric. When we enter the startup and tech world, we often need other parameters to measure their impact, for a few reasons.

Ecosystems take time to build

Often, tech companies are opening up new spaces, industries and operate with new business models. Those industries, areas and business models are not stand-alone, and they often need several pieces to come together before a company can start being profitable.

Think for instance how Salesforce began to operate with – at the time – a new business model for enterprise SaaS, which relied on a subscription-based revenue model.

While Salesforce grew consistently and quickly in terms of revenues, it was unprofitable for quite some time:


Indeed, Salesforce 2018 finally posted a net income, after years of net losses. Today the SaaS business model has become the norm for most tech startups and massive industries.

Yet it took years to build a context that would allow a single company, like Salesforce to make a profit:

Software as a service (SaaS) is a model where a third-party provider hosts the infrastructure and applications and make them available through the Internet. This model leverages web-based software and on-demand applications that run centrally on the server of the provider, while the company purchasing the service will use those applications based on need and without the upfront cost.

Growth over profitability

Another critical element is growth. As startups try to dominate a niche, space, industry, and marketplace, they emphasize growth rather than profitability.

Spotify is a two-sided marketplace where artists and music fans engage. Spotify has a free ad-supported service and a paid membership. Founded in 2008 with the belief that music should be universally accessible, it generated €11.7 billion in 2022. Of these revenues, 87.4% or €10.25 billion came from premium memberships, while over 12.6% or €1.47 billion came from ad-supported members. By 2022, Spotify had 489 million users, of which 205 million premium members and 295 million ad-supported users.

In many cases, tech companies are not only offering new products but also adopting new business models that open up spaces that before didn’t exist. In this scenario, market domination becomes the rule.

Thus, metrics like user acquisition become the primary elements those companies focus on to judge whether the business is going in the right direction.

When you focus on growth, profitability will in many cases be affected negatively.

Thus, to build a more sustainable business model, often companies – that have been focusing on growth for years – will have to slow down a bit and allow their bottom line to keep up with the growth pace.

Free cash flow as a north star


Netflix is a profitable company, which almost $4.5 billion in net profits in 2022, slowing down compared to over $5 billion in earnings for 2021.

If you look at Amazon’s financials in the early 2000s, you notice a negative bottom line. Indeed, Amazon, between 2001 and 2002, was operating with a net loss of over a hundred million dollars.

However, already in 2002, Amazon was generating cash from its operations.

Indeed, Amazon has been able over the years to create a built-in cash machine mechanism for its business model to generate a massive amount of cash independently from its profit margins:


Thus, if we were looking at Amazon purely from its bottom line, we would assume the company would not be worth much. Yet Amazon – at the time of this writing – is among the tech companies with the highest market capitalization in the world.

Amazon managed to disrupt several industries and grow at fast speed thanks to its cash conversion cycle and its ability to generate cash from its operations.

Do we need to forget about the bottom line?

When Google showed its numbers back in the 2000s not only it was a company growing at a fast speed; but it was also extremely profitable. Indeed, besides the year 2000; in 2003 Google had already passed the billion revenue mark and had over a hundred million in net profit.

The same applies to Facebook. When the company made its IPO back in 2012, it had already a billion in net profit and over three billion in revenues. Both companies would become the largest tech giants of our days.

They had created new businesses, and technologies, and operated new business models; yet they were highly profitable.

Thus, looking at the bottom line in combination with other metrics more focus on cash generation is still critical.

However, it is essential to make a critical differentiation.

When a company is not able to be profitable due to its inability to figure out a sustainable business model, that makes it way riskier than other companies that instead are not profitable because they decided to emphasize cash generation and growth.

In other words, the fact that Amazon chooses to keep its profit margin low is a strategic decision.

Compared to an upcoming startup, that instead is operating at a net loss only because it can’t figure out yet a business model. In the latter scenario, the bottom line still matters!

How does Amazon compute its free cash flow?


Example of how Amazon computes its free cash flows, from Amazon Q1 2020.

Key Takeaways

  • Free cash flow is the cash generated by a company’s operations after deducting non-cash expenses, changes in working capital, and capital expenditures.
  • Tech companies may perform poorly in terms of net profit despite strong revenue growth due to investments in new spaces, industries, and business models.
  • Ecosystems take time to build, and profitability may take years to achieve as companies establish new contexts for their operations.
  • Growth is often prioritized over profitability in the tech industry as companies aim to dominate markets and niches.
  • Metrics like user acquisition and market domination become more important in judging the success of tech companies.
  • Free cash flow becomes a crucial metric in evaluating tech companies’ sustainability and ability to generate cash independently from profit margins.
  • Amazon is an example of a tech company that prioritizes cash generation through its cash conversion cycle, even with low profit margins.
  • While profitability is essential, a focus on cash generation and growth can be strategic decisions for tech companies.
  • Companies struggling to achieve profitability due to an unsustainable business model are riskier than those emphasizing cash generation and growth.
  • Tech giants like Google and Facebook have demonstrated high profitability in combination with strong growth.
  • Free cash flow is calculated as the cash generated from operations minus capital expenditures and changes in working capital. It provides insights into a company’s financial health and ability to invest in business growth.

Free Cash Flow Case Studies

Airbnb Free Cash Flow

Airbnb generated $3.4 billion in free cash flow in 2022, compared to over $2 billion in 2021. Free cash flow is a critical metric as it shows the cash available to the company once it has covered its operating and capital expenditures.

Roblox Free Cash Flow


Amazon Free Cash Flow

According to a FourWeekMBA Analysis, in 2022, Amazon generated $18.44 billion in free cash flows, compared to $38.44 billion in 2021. The decrease in free cash flow was primarily due to a decrease in cash from operating activities and an increase in cash employed for Purchases of property and equipment.

Connected Financial Concepts

Circle of Competence

The circle of competence describes a person’s natural competence in an area that matches their skills and abilities. Beyond this imaginary circle are skills and abilities that a person is naturally less competent at. The concept was popularised by Warren Buffett, who argued that investors should only invest in companies they know and understand. However, the circle of competence applies to any topic and indeed any individual.

What is a Moat

Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Buffet Indicator

The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Venture Capital

Venture capital is a form of investing skewed toward high-risk bets, that are likely to fail. Therefore venture capitalists look for higher returns. Indeed, venture capital is based on the power law, or the law for which a small number of bets will pay off big time for the larger numbers of low-return or investments that will go to zero. That is the whole premise of venture capital.

Foreign Direct Investment

Foreign direct investment occurs when an individual or business purchases an interest of 10% or more in a company that operates in a different country. According to the International Monetary Fund (IMF), this percentage implies that the investor can influence or participate in the management of an enterprise. When the interest is less than 10%, on the other hand, the IMF simply defines it as a security that is part of a stock portfolio. Foreign direct investment (FDI), therefore, involves the purchase of an interest in a company by an entity that is located in another country. 


Micro-investing is the process of investing small amounts of money regularly. The process of micro-investing involves small and sometimes irregular investments where the individual can set up recurring payments or invest a lump sum as cash becomes available.

Meme Investing

Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.

Retail Investing

Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.

Accredited Investor

Accredited investors are individuals or entities deemed sophisticated enough to purchase securities that are not bound by the laws that protect normal investors. These may encompass venture capital, angel investments, private equity funds, hedge funds, real estate investment funds, and specialty investment funds such as those related to cryptocurrency. Accredited investors, therefore, are individuals or entities permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.

Startup Valuation

Startup valuation describes a suite of methods used to value companies with little or no revenue. Therefore, startup valuation is the process of determining what a startup is worth. This value clarifies the company’s capacity to meet customer and investor expectations, achieve stated milestones, and use the new capital to grow.

Profit vs. Cash Flow

Profit is the total income that a company generates from its operations. This includes money from sales, investments, and other income sources. In contrast, cash flow is the money that flows in and out of a company. This distinction is critical to understand as a profitable company might be short of cash and have liquidity crises.


Double-entry accounting is the foundation of modern financial accounting. It’s based on the accounting equation, where assets equal liabilities plus equity. That is the fundamental unit to build financial statements (balance sheet, income statement, and cash flow statement). The basic concept of double-entry is that a single transaction, to be recorded, will hit two accounts.

Balance Sheet

The purpose of the balance sheet is to report how the resources to run the operations of the business were acquired. The Balance Sheet helps to assess the financial risk of a business and the simplest way to describe it is given by the accounting equation (assets = liability + equity).

Income Statement

The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).

Cash Flow Statement

The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Capital Structure

The capital structure shows how an organization financed its operations. Following the balance sheet structure, usually, assets of an organization can be built either by using equity or liability. Equity usually comprises endowment from shareholders and profit reserves. Where instead, liabilities can comprise either current (short-term debt) or non-current (long-term obligations).

Capital Expenditure

Capital expenditure or capital expense represents the money spent toward things that can be classified as fixed asset, with a longer term value. As such they will be recorded under non-current assets, on the balance sheet, and they will be amortized over the years. The reduced value on the balance sheet is expensed through the profit and loss.

Financial Statements

Financial statements help companies assess several aspects of the business, from profitability (income statement) to how assets are sourced (balance sheet), and cash inflows and outflows (cash flow statement). Financial statements are also mandatory to companies for tax purposes. They are also used by managers to assess the performance of the business.

Financial Modeling

Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.

Business Valuation

Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.

Financial Ratio



The Weighted Average Cost of Capital can also be defined as the cost of capital. That’s a rate – net of the weight of the equity and debt the company holds – that assesses how much it cost to that firm to get capital in the form of equity, debt or both. 

Financial Option

A financial option is a contract, defined as a derivative drawing its value on a set of underlying variables (perhaps the volatility of the stock underlying the option). It comprises two parties (option writer and option buyer). This contract offers the right of the option holder to purchase the underlying asset at an agreed price.

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