Corporate Finance
Free Cash Flow versus Net Income
Follow the money past the income statement to the number that actually funds dividends, debt paydown, and growth, and learn why the two diverge exactly when it matters.
- Intermediate
- 6 min total
- 10 chapters
What decision this helps you make: Whether to trust a P&L (in your own business, a target you're buying, or a stock you're analyzing), and how much cash is genuinely available to deploy.
- Related case study: Kodak: The Margin That Blocked the Future
- Related data & research: How Companies Actually Get Financed
What this topic is
Net income is profit by accounting rules: revenue earned minus expenses incurred, with timing set by accruals. Free cash flow is the money actually left after operations AND the capital spending needed to sustain them: operating cash flow minus capex. One is an opinion about a period; the other is spendable.
Why it matters
Dividends, acquisitions, debt payments, and survival all run on cash, not on earnings. The gap between the two numbers is where fast-growing companies starve, where earnings games hide, and where quietly great businesses reveal themselves.
Who should learn it
Owners reading their own statements, buyers valuing targets, investors screening stocks, and students who've learned the income statement but not what it can't say.
What you will understand
- Walk from net income to free cash flow, every bridge step
- Know the three forces that split the numbers apart
- Read persistent gaps as the diagnostic they are
- Value businesses on the cash they free, not the earnings they report
Prerequisites
Common misconception
"Net income is the bottom line." It's A line, computed under timing rules that recognize revenue before cash arrives and spread big purchases over years. Companies report profits into the quarter they go broke; the bank account runs on free cash flow.