History
In 1986 Harvard's Michael Jensen argued in "Agency Costs of Free Cash Flow" that managers sitting on surplus cash tend to waste it on empire-building acquisitions rather than return it, a rationale for the 1980s leveraged-buyout boom. That same year Warren Buffett told shareholders to focus on "owner earnings"—cash left after maintenance investment—rather than accounting profit.
Calculation and use
Operating cash flow of 1 trillion won minus 400 billion of capex gives FCF of 600 billion. Consistently positive FCF funds dividends, buybacks and debt repayment, so it is used to judge whether a dividend is sustainable. Discounted cash flow (DCF) valuation discounts future FCF, and FCF yield divides it by market cap.
Why it differs from net income
Net income includes non-cash items like depreciation and credit sales, so a firm can be profitable on paper yet run out of cash. Fast-growing firms may show negative FCF temporarily, so read it as a trend alongside EPS and EV/EBITDA.
FAQ
- Is negative FCF bad?
- It can be temporary during heavy investment, but if persistent it signals reliance on outside funding.
- Where do I find FCF?
- Use the cash-flow statement: operating cash flow minus purchases of property, plant and equipment.
Sources reviewed: 2026-10-26
References
- Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–329.
- Damodaran, A. (2012). Investment Valuation (3rd ed.). Wiley.
- Buffett, W. (1986). Letter to the Shareholders of Berkshire Hathaway Inc. (owner earnings).