What distinguishes Free Cash Flow (FCF) from general cash flow?

Free Cash Flow (FCF) is defined as the cash generated by a company that is available for distribution to its investors (both equity and debt holders) after all operating expenses and capital expenditures (CapEx) have been paid. This distinction is crucial because it reflects the cash that the company can actually use to pay dividends, buy back stock, or improve the business, unlike general cash flow which can encompass all inflows and outflows without that specificity.

Calculating FCF begins with operating cash flow, which measures the cash generated from core business operations. However, it’s important to subtract capital expenditures, which are necessary investments in fixed assets (like buildings and equipment) that enable the company to maintain or grow its operations. By subtracting CapEx from operating cash flow, Free Cash Flow provides a clearer picture of the cash that remains after maintaining the company's asset base.

Other statements do not accurately characterize FCF in relation to cash flow. For instance, FCF does not disregard capital expenditures, nor is it exclusively focused on operational revenue or merely a summary of tax and depreciation items. These factors are part of broader cash flow considerations but do not define what Free Cash Flow specifically measures.