Free Cash Flow (FCF)
Definition
Free cash flow is the cash a business generates after the investments needed to maintain and grow it — cash genuinely available to capital providers. The most common simple definition is cash flow from operations minus capital expenditures.
FCF comes in two main flavors: unlevered FCF (before interest, available to all capital providers, discounted at WACC) and levered FCF (after interest and debt service, available to equity holders, discounted at the cost of equity). Which one you use must match the discount rate and the value you are solving for.
FCF is harder to manipulate than earnings and is the fundamental basis of intrinsic (DCF) valuation: a company is worth the present value of its future free cash flows.
Why interviewers ask
"How do you calculate free cash flow?" and "why can a profitable company have negative FCF?" (heavy capex or working-capital build) are core questions. The classic trap is mismatching levered/unlevered cash flows with the discount rate — unlevered FCF with WACC gives enterprise value; levered FCF with cost of equity gives equity value.
Related terms
Interviews don't test definitions — they test recall under pressure.
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