Free cash flow theory

Free cash flow theory suggests that the cash a company generates after covering its operating expenses and investments in assets is valuable because it can be used to pay dividends, buy back shares, reduce debt, or fund growth. This remaining cash, called free cash flow, indicates a company's financial health and efficiency. Investors and managers use it to assess whether a company is creating value or potentially wasting resources, making it a key indicator of overall financial performance and future potential.