What does "free cash flow" actually tell me about a company?
I've been trying to learn about fundamental analysis and keep seeing "free cash flow" mentioned as something important to look at. I understand it's basically the cash a company has left after paying for everything, but I'm not really sure what that actually tells me as an investor.
Like, if Company A has higher free cash flow than Company B, does that automatically make it a better investment? And what's considered "good" free cash flow anyway?
Thanks in advance!
1 Answer
Free cash flow shows how much actual cash a company generates after covering all its expenses and investments - it's like their "leftover money" that could be returned to shareholders or reinvested.
Higher FCF isn't automatically better though - you need to look at it relative to the company's size (market cap) and growth stage. A mature company should have strong, consistent FCF, while a fast-growing company might have lower FCF because they're reinvesting heavily.
Generally look for positive and growing FCF over time, and compare the FCF yield (FCF divided by market cap) to similar companies in the same sector. It's one useful metric but definitely not the whole picture!