Free Cash Flow (FCF) represents the amount of cash a company generates after accounting for capital expenditures necessary to maintain or expand the asset base. This metric is significant because it indicates how well a company can generate cash to fund its operational needs and return value to its stakeholders. FCF is calculated by taking Operating Cash Flow (found in the Cash Flow Statement) and subtracting Capital Expenditures (CapEx).

For example, if a company reports $10 million in Operating Cash Flow and $3 million in Capital Expenditures, its Free Cash Flow would be $7 million.

Free Cash Flow is a crucial indicator of financial health as it tells stakeholders about the liquidity position of the company. Unlike earnings, which are influenced by several non-cash expenses and accounting treatments, FCF shows the actual cash available. Companies with positive and increasing FCF over time are often regarded as financially stable. However, negative FCF is not always indicative of poor performance, as it may result from significant investments in future growth, such as expansion or research and development.