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Intermediate · Lesson 5 of 9

Free cash flow

6 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

Free cash flow (FCF) is operating cash flow minus capital expenditure: the cash left after keeping the business running and growing. It is what can pay dividends, buy back shares or repay debt.

FCF yield is FCF divided by market value. A company with a 7% FCF yield generates 7 cents of free cash per dollar of market value each year. Comparing FCF yield with the dividend yield tells you whether the dividend is covered by real cash.

Be careful with companies that exclude large recurring costs (such as share-based pay or lease payments) from "adjusted" cash flow. Use the reported figures and adjust yourself.

Formula

FCF = Operating cash flow - Capital expenditure
FCF yield = FCF / Market cap

Key takeaways

  • FCF = operating cash flow - capex.
  • Dividends should be covered by FCF over time.
  • Be sceptical of "adjusted" figures.

Check your understanding

1. Operating cash flow $800m, capex $500m, dividends paid $400m. Is the dividend covered by FCF?

  • Yes, easily
  • No, FCF of $300m is below $400m
  • Cannot tell
  • Yes, because profit is positive
Show the answer

No, FCF of $300m is below $400m. FCF is $300m, so $100m of dividends came from elsewhere (debt or cash).

2. FCF yield is...

  • FCF / market capitalisation
  • Dividends / price
  • Profit / revenue
  • Capex / revenue
Show the answer

FCF / market capitalisation. It measures free cash per dollar of market value.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.