Cash flow is the money that actually comes in and goes out of a company. Free cash flow is the cash from operations minus the investments (capital expenditures) needed to maintain and grow the business. It is the money that can pay dividends, buy back shares or repay debt.
Why profit and cash differ
Accounting profit includes items that are not cash, such as depreciation, and it records sales when they are made, not when customers pay. A company can report profits while running out of cash - for example when customers pay late or inventory piles up.
What to look for
Over several years, operating cash flow should roughly follow net income. Free cash flow that is consistently positive and growing is a sign of a healthy business; persistent negative free cash flow means the company depends on new loans or new shares.
This content is general information, not investment advice.