Cash flow represents the amount of money that is being transferred in and out of a business. There are several types of cash flow with the two most common types are inflows (cash received) and outflows (cash spent).
Free cash flow (FCF) is one of the most important financial metrics used by investors to determine the attractiveness of a single company. If the business is able to generate positive cash flow, investors are likely to be more attracted to the company as it doesn’t need additional funding.
FCF is calculated by reducing money spent on operations from inflows. FCF excludes the non-cash expenses, but includes outflows on equipment, assets, and working capital from the balance sheet.
Ultimately, free cash flow reported by the company represents available funds to pay dividends, buy back shares or pay interest to investors.
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