Free cash flow shows the cash that company has available after paying to purchase capital assets (capital expenditure).
It’s easier to understand meaning of the free cash flow by checking the formula that is used to calculate it which is :
Free Cash flow= Earnings Before Interest and Tax (1-tax rate) + Depreciation and other non cash items- Change in Working Capital – CAPEX
In other words, you start from the EBIT and you take off the tax. You then need to add back depreciation and other non cash items. The next step is calculate the change in the working capital (changes in receivables, payables, stock, accruals and prepayments). Finally, you deduct the amount spent to purchase fixed assets.
What is left is the cash that the company has generated which is free for other uses. A low free cash flow can mean that the company might face a liquidity deficiency or the need to raise debt. On the other hand, companies that invest in new projects can have low or even negative free cash flow.