Free cash flow is a good indication of what a company really has left over after meeting obligations, and thus could theoretically return to shareholders.
Free cash flow is sometimes called "owners' earnings."
Free cash flow is defined as net after tax-earnings, plus depreciation and amortization and other noncash items, less annual capital expenditures, less (or plus) changes in working capital (current assets and liabilities).
It is surplus cash that is really free, not waiting for a bill to come for a big capital purchase or inventory increase.
Earn income, pay for costs of doing business, and what's left over is yours to keep as an owner.
Free cash flow is a much more realistic long-term view of business success and potential owner proceeds than EBITDA and is used by many value investors as the basis for calculating intrinsic value.
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