Free cash flow is the money a company has left after all operating costs and necessary investments have been paid. It shows how much cash is truly available. This money can be used for dividends, debt repayment or further growth.
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Free cash flow shows how much financial flexibility a company truly has.
A company receives money from its normal activities, for example by selling products. From this money, costs must first be paid, such as salaries, rent and raw materials. After that, investments often have to be made as well, for example in machines or technology to keep the business running.
What remains after this is free cash flow. This is important for investors because it indicates how much cash a company has available without taking on new debt. A company can make a profit on paper, but if there is little free cash flow, it can still be under financial pressure.
Short example:
Suppose a company receives €10 million in revenue. Operating costs amount to €7 million. That leaves €3 million from normal business activities.
The company then invests €1 million in new machines.
The free cash flow is therefore €3 million minus €1 million = €2 million. That amount is freely available for example for dividends or debt repayment.
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