FCF refers to the amount of cash flow available for distribution among all the claim holders of an including equity holders, debt holders, preferred stock holders, convertible security holders, etc. In other words, FCF is the amount of cash that is left with the firm, after the payment of all cash expenses and investments.
The formula of FCF is given by:
FCF= Net Income+ Amortization and Depreciation- Changes In Working Capital- Capital Expenditures.
FCF gives a fair idea about the quality of a firm's earnings. It also helps in determining the ease with which firms can grow and pay dividends to shareholders. Sometimes, even profitable businesses have negative cash flows. Companies having sound financial health generate positive free cash flow, which means they have surplus cash they can use to pay dividends and buyback shares.