Free cash flow is the amount of money a company has left over after it has covered its operating expenses and paid for capital expenditures. It is generally used to pay dividends to shareholders and repay loans.
For example, a manufacturing company generates $350,000 in operating cash flow but spends $80,000 on new machinery, resulting in free cash flow of $270,000. This amount is available to pay down debt, distribute dividends, or fund further expansion.
Why it matters: It is the ultimate measure of financial flexibility; it's the cash left over to pay dividends, reduce debt, or acquire competitors.
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