Companies use a number of financial metrics to evaluate their performance. For many companies, free cash flow (FCF) provides a particularly important measurement of a company’s business performance. Free cash flow is the amount of cash a company has remaining after it has paid its operating and capital expenses.

Companies have three core types of financial statements—the balance sheet, the income statement, and the statement of cash flows. Most companies prepare updated financial statements on a quarterly basis. Reading these financial statements together provides a window into a company’s financial health over time.

Free cash flow (FCF) is measured by taking cash flow from operating activities, an amount found on a company’s statement of cash flows. Capital expenditures, such as major purchases of property and equipment, are typically deducted from the cash flow from operating activities amount to derive the FCF amount.

It is considered a non-GAAP financial measure, meaning it is not prepared in accordance with U.S. Generally Accepted Accounting Principles. The closest GAAP metric to FCF is cash flow from operating activities. A company’s net income is found toward the bottom of its income statement, also known as a profit & loss (P&L) statement.

When companies present non-GAAP financial measures, the SEC disclosure requirements in Regulation G applies. Under Regulation G, the most directly comparable GAAP financial measure must be presented with equal or greater prominence as compared to the non-GAAP financial measure. In addition, a reconciliation table must be provided showing the adjustments made to net income to derive the free cash flow amount. A FCF reconciliation table usually shows adjustments to net income for non-cash expenses, non-routine capital expenditures, and changes in working capital.

A related financial metric known as free cash flow conversion (FCF conversion) provides insight into how effectively a company is able to convert its earnings into cash flows. FCF conversion is calculated by dividing FCF by earnings. The number used in the denominator for earnings usually is either net income or adjusted EBITDA.

Some companies may calculate a metric called levered free cash flow. Levered FCF is the amount of cash a company has after it has paid its capital expenses and debt obligations.

As an example, in Reddit’s first quarter earnings results for 2025, the company reported that Reddit’s free cash flow was $126.6 million in the first three months of 2025, compared with free cash flow of only $29.2 million in the first three months of 2024. As another example, the multinational industrial conglomerate 3M Company noted in its 10-Q quarterly report covering the first quarter of 2025 that strong free cash flow capability was a key driver of the stability of 3M’s business model. Companies with higher FCF may have more flexibility to invest in future growth opportunities, pay down debt, and pay dividends.

A low FCF or FCF conversion rate can reveal underlying problems with a business. Conversely, a strong FCF or conversion amount does not necessarily mean a business is healthy overall. FCF is one of many financial metrics that should be evaluated in understanding the overall performance and future trajectory of a business.