Part 4 · Cash flow statement: the money that actually hit the bank account · Lesson 20
Free cash flow (FCF): the money that's really left over
Having profit, or even cash coming in, doesn't mean it's all yours yet. Subtract the investment the business must make just to keep running, and calculate the cash that's actually free.
QToday's question
A company earned KRW 1.2 billion in net income last year. Can it pay all KRW 1.2 billion out as dividends? What if the cash that came into its account was KRW 1.8 billion?
Neither net income nor cash from operations is yet 'money you can spend'. When the oven wears out you have to buy a new one, and stores need repairs too. In this lesson, we subtract those necessary investments and calculate what's left: free cash flow.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 18 you learned that profit and cash are different, and in Lesson 19 how to read the cash flow statement in three columns: operating, investing, and financing. Robin Bakery had +KRW 1.8 billion from operations, −KRW 1.0 billion from investing, and −KRW 400 million from financing. The KRW 800 million of capital expenditure connects to the ovens, store equipment, and depreciation in Lesson 7, and we saw market cap and earnings yield in Lesson 16.
- STEP 1 · Basic conceptsOperating cash flow minus capital expenditure
Explain what is and how Robin Bakery's FCF of KRW 1 billion comes about.
- STEP 2 · Understanding how it worksWhere FCF goes, and FCF yield
Use FCF to judge capacity for dividends, buybacks, and debt repayment, and compare the with the earnings yield.
- STEP 3 · Real-world applicationReading a real company's three years of FCF
Find operating cash flow and the acquisition of property, plant and equipment in the DART cash flow statement, calculate FCF yourself, and work out why FCF is negative.
STEP 1Operating cash flow minus capital expenditure
Take the money that came into your account and subtract the 'money that has to be spent again'. What's left is the cash that's truly free.
Think of a taxi driver. Even if he pockets KRW 50 million in cash over a year of driving, if the car is worn out and he has to spend KRW 15 million on a replacement, the money he can actually use for living expenses or savings is KRW 35 million. If he doesn't replace the car, he can't work next year, so the price of the car is less a 'choice' than a necessary cost of staying in business.
Companies are the same. The operating cash flow you saw in Lesson 19 is cash that actually came in from the core business. But if you hand all of this money to shareholders, there is no money to fix the oven when it breaks or the store when it gets worn. So we look separately at what is left after subtracting the money spent buying property, plant and equipment such as factories and equipment, that is, capital expenditure (). This is .
Let's follow Robin Bakery's numbers once more. Net income was KRW 1.2 billion, but depreciation of KRW 1 billion is a cost that doesn't take cash out, so we add it back, and we subtract the KRW 400 million increase in working capital such as trade receivables and inventory, which gives operating cash flow of KRW 1.8 billion. Subtract the KRW 800 million spent on ovens and store equipment and KRW 1 billion remains. The −KRW 1.0 billion of investing activities also includes KRW 200 million for intangible assets and the like, but FCF is usually calculated by subtracting only the most essential item, acquisition of tangible assets. There is also a more conservative approach that subtracts intangible assets too, so get in the habit of checking which definition a source uses.
What's interesting is that depreciation of KRW 1 billion and capex of KRW 800 million are similar. Depreciation is 'the speed at which the equipment you have is wearing out', and capex is 'the speed at which you replenish it'. If the two are similar, the company is investing at about the level needed to maintain its current size; if capex is far larger than depreciation, it's a sign the company is expanding.
Quick checkNext year, Robin Bakery's operating cash flow stays at KRW 1.8 billion, but capex rises to KRW 1.4 billion because it opens new stores. What is FCF?
STEP 2Where FCF goes, and FCF yield
Look at what you can do with the KRW 1 billion that's left, and how it compares with the share price.
FCF is money the company can use freely, so it matters especially to shareholders. There are four main uses. First, paying dividends to shareholders. Second, buying to reduce the share count (in Lesson 16 you saw that cancelling them raises EPS). Third, repaying debt to reduce the interest burden. Fourth, saving it to buy another company or make a big investment when an opportunity arises.
Of last year's FCF of KRW 1 billion, Robin Bakery spent KRW 300 million on dividends and KRW 100 million on debt repayment, leaving about KRW 600 million in cash. In fact, cash on the balance sheet rose from KRW 400 million to KRW 800 million, and the numbers add up once you factor in a further KRW 200 million of intangible asset investment. Dividing FCF by dividends gives the . 10 ÷ 3 ≈ 3.3x means it earned enough to pay the dividend more than three times over, so the dividend can be seen as stable.
FCF
dividend coverage
FCF Yield
These are fictional company numbers. Unit: KRW 100 million. Dividend coverage = FCF ÷ dividends, FCF yield = FCF ÷ market cap. Robin Bakery's market cap is share price KRW 9,000 × 2 million shares = KRW 18 billion. The 'heavy-investment year' is a case where operating cash flow stays at KRW 1.8 billion but KRW 3 billion is spent on a new factory. Dark Cloud Electronics' market cap is share price KRW 2,500 × 1 million shares = KRW 2.5 billion. When FCF is negative, FCF yield is shown only as 'Negative'.
In Lesson 16 you saw the earnings yield (net income ÷ market cap), the inverse of PER. In the same way, FCF divided by market cap is the . For Robin Bakery it is KRW 1 billion ÷ KRW 18 billion ≈ 5.6%, slightly lower than the of KRW 1.2 billion ÷ KRW 18 billion ≈ 6.7%. This is because part of the profit goes back into maintaining equipment. If the FCF yield is similar to or higher than the earnings yield, profit is turning into actual cash well; if it is much lower, the company has to keep investing heavily to generate profit.
Why put so much weight on cash? In Learn (Economics) Lesson 17 you learned that a stock's value is the future cash it will earn, converted into today's value. That 'cash' is close to the FCF that shareholders can actually take. That's why professional investors look at FCF yield right alongside the P/E.
Common misconceptions
- "Negative FCF means a bad company?"
- In a year when a company builds a big factory, even a solid company can have negative FCF. You need to separate whether it's negative because investment is large despite strong operating cash flow, or because operating cash flow itself is weak. The second is the warning sign.
- "The bigger the FCF, the bigger the dividend, naturally?"
- FCF is the 'ability' to pay dividends, not the 'intent'. Many companies hoard it or spend it on other investments. Actual dividend policy is covered separately in Lesson 25 under the payout ratio.
- "Looking at one year of FCF is enough?"
- Capex swings from year to year. Adding up three to five years and looking at the average is far more reliable.
Quick checkA company with a KRW 20 billion market cap has FCF of KRW 1.6 billion and net income of KRW 2 billion. What are its FCF yield and earnings yield?
STEP 3Reading a real company's three years of FCF
Now find just two lines in a real business report's cash flow statement and calculate FCF yourself.
Find it yourself on DART
Open the business report and go to III. Financial Matters → 2. Consolidated Financial Statements → 2-5. Consolidated Statement of Cash Flows. Write down the total for 1operating cash flow at the top of the table, then go down the investing column and find the 2acquisition of property, plant and equipment line. Numbers in parentheses are cash going out (negative). Subtract one from the other and you have FCF. In the financing column of the same table, find 3payment of dividends and 4acquisition of treasury shares to see how much of the FCF went back to shareholders. A single business report has three years side by side, which makes trends easy to see.
| Consolidated statement of cash flows (KRW million) | Term 56 · 2024 | Term 55 · 2023 | Term 54 · 2022 |
|---|---|---|---|
| 1Operating cash flow | 72,982,621 | 44,137,427 | 62,181,346 |
| Net income | 34,451,351 | 15,487,100 | 55,654,077 |
| Cash flow from investing activities | (85,381,702) | (16,922,817) | (31,602,804) |
| 2 Acquisition of property, plant and equipment | (51,406,355) | (57,611,292) | (49,430,428) |
| Net decrease (increase) in short-term financial instruments | (32,976,756) | 39,421,565 | 15,214,321 |
| Cash flow from financing activities | (7,797,243) | (8,593,059) | (19,390,049) |
| 3 Payment of dividends | (10,888,749) | (9,864,474) | (9,814,426) |
| 4 Acquisition of treasury shares | (1,811,775) | 0 | 0 |
This table is transcribed from the screen (only some lines excerpted). Source: DART, Samsung Electronics business report filed 2025.03.11 (rcpNo 20250311001085), III-2-5 consolidated statement of cash flows, checked 2026-10-08. It is an example for learning how to read a cash flow statement and is not investment advice.
Unit: KRW trillion (KRW million figures rounded). FCF = operating cash flow − acquisition of property, plant and equipment, calculated by Robin Invest. Source is the same as the table above.
Putting the three years side by side tells a story. In 2022 and 2024, operating cash flow exceeded capex, so FCF was positive at about KRW 12.8 trillion and KRW 21.6 trillion respectively. In 2023, however, the semiconductor cycle turned down and operating cash flow fell to KRW 44.1 trillion, yet capex actually rose to KRW 57.6 trillion, so FCF came to about −KRW 13.5 trillion. Even in the downturn, the company did not cut investment for the future.
With negative FCF, how did it pay KRW 9.9 trillion in dividends? In the investing column for the same year, the 'net decrease in short-term financial instruments' is +KRW 39.4 trillion. It broke into financial instruments it had been holding like deposits and used them. So don't draw a conclusion from the FCF line alone; look together at why it was negative (a downturn or investment) and where the shortfall was made up (hoarded cash or new debt). A gap filled from hoarded cash and one filled by debt or a capital raise carry very different weight. Dark Cloud Electronics in the next lesson is the second case.
How to use it in investing
| What you see | How to usually read it | What to check further |
|---|---|---|
| FCF consistently positive, at least 2x the dividend | Dividend capacity looks ample | Payout ratio and dividend policy (Lesson 25) |
| Strong operating cash flow but negative FCF | May be a heavy-investment period | Purpose of the investment; capex relative to depreciation |
| Operating cash flow itself is negative | The core business isn't generating cash | Rising receivables and inventory (Lessons 21, 22) |
| Negative FCF but dividends and buybacks continue | Check where the shortfall was covered | Drawdown of cash on hand, or borrowing and equity issuance |
Not always. The weight of capex differs greatly by industry. In industries that need a lot of equipment, such as semiconductors and telecoms, FCF tends to come out smaller than profit, while in low-equipment industries like software, FCF is similar to or larger than profit. It's best to compare FCF within the same industry and by adding up several years.
Quick checkComparing 2024 FCF and dividends paid in the table above, roughly how many times the dividend was FCF?
✓What we learned today
- FCF = operating cash flow − capital expenditure (acquisition of property, plant and equipment). For Robin Bakery, 18 − 8 = KRW 1 billion.
- FCF is the source of dividends, buybacks, and debt repayment. With KRW 1 billion of FCF, Robin Bakery covers its KRW 300 million dividend more than three times over.
- FCF yield = FCF ÷ market cap. Robin Bakery's is 10 ÷ 180 ≈ 5.6%, slightly lower than its net-income-based earnings yield of 6.7%.
- Negative FCF isn't automatically bad. It can turn negative in a year when a big factory is built, so separate whether it's due to investment or weak operating cash flow.
- In real financial statements, you can calculate FCF by finding just two lines: operating cash flow and the acquisition of property, plant and equipment within investing activities.
Some companies with negative FCF have negative operating cash flow itself, not just heavy investment. In the next lesson, we follow Dark Cloud Electronics, profitable for three years in a row while its cash dries up, to see why 'bankruptcy despite profits' happens.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Robin Bakery's operating cash flow is KRW 1.8 billion and its acquisition of tangible assets is KRW 800 million. What is FCF?
FCF = operating cash flow − capital expenditure = 18 − 8 = KRW 1 billion. It's a different number from the KRW 1.2 billion of net income.
Q2. Which of the following is hard to call a use of FCF?
Depreciation is a cost that doesn't take cash out, so it isn't money you 'pay'. If anything, it's added back to net income when calculating operating cash flow.
Q3. With a market cap of KRW 18 billion, roughly what is Robin Bakery's FCF yield?
FCF of KRW 1 billion ÷ market cap of KRW 18 billion ≈ 5.6%. The 6.7% is the earnings yield calculated with the KRW 1.2 billion of net income.
Q4. How is it best to view a year in which FCF turned negative because a new factory was being built, even though operating cash flow was strong?
A negative caused by investment can be for future growth. It needs to be distinguished from a negative caused by weak operating cash flow itself.
Q5. Which two lines should you find in a DART business report to calculate FCF?
Take operating cash flow at the top of the consolidated cash flow statement and subtract the acquisition of property, plant and equipment in the investing column, and you have FCF.
NextTerms · Next lesson · Related tools
Operating cash flow minus capital expenditure (acquisition of tangible assets). It's the cash left after making the investments needed to keep the business running, and it is the source of dividends, buybacks, and debt repayment.
FCF yieldFCF YieldFree cash flow divided by market cap. It shows how much cash is left for shareholders in a year relative to the share price, and is compared side by side with the earnings yield calculated from net income.
Dividend coverage (FCF basis)Dividend Coverage by FCFFree cash flow divided by dividends, as a multiple. Above 1x means the dividend is covered by cash left over from the core business; below 1x means the shortfall is being made up from somewhere else.
Capital expenditureCapital expenditureMoney a company spends to buy production assets such as factories, machinery and equipment. It becomes revenue for equipment and construction companies and increases future production capacity.
Cash flow statementCash flow statementA table showing the cash that actually came in and went out through operating, investing and financing activities over a period. Closing cash equals cash and cash equivalents on the balance sheet.
DepreciationDepreciationSpreading the purchase price of equipment over its years of use and expensing it each year. It is an expense for which no cash goes out that year.
Earnings yieldEarnings yieldEPS divided by the share price, i.e. 1 ÷ P/E. A P/E of 20x means an earnings yield of 5%, used for comparison with Treasury and deposit rates.
Treasury stockTreasury stockThe company's own shares that it has bought and holds. It is recorded as a deduction from equity.
Put what you learned to use right away
Dividend Paycheck Planner→Learn (Economics) Lesson 17 · Why do rising rates hurt growth stocks more?→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.