Why Free Cash Flow Is the Most Important Number in Investing

If you’ve followed me for any length of time, you know I’ve spent over three decades studying the greatest investors in the world, particularly Warren Buffett. And if there’s one concept that separates successful investors from the rest, it’s this: free cash flow is king.

Most people—even professional fund managers—are looking in the wrong places when it comes to evaluating businesses. They focus on earnings per share (EPS) or stock price momentum, but that’s just financial noise. If you want to invest with certainty and clarity, especially using the Rule #1 investing philosophy, you need to focus on what really matters: how much real cash a business is generating.

Understanding Patient Money and the Power of Free Cash Flow

One of the most profound advantages you and I have as individual investors is that we’re not under pressure to act. Unlike mutual fund managers, we don’t have pension fund committees breathing down our necks, demanding quarterly results. We can sit in cash as long as it takes. That’s what I call patient money—and it’s one of the most powerful tools you’ve got.

Patient investors can wait for the perfect moment to buy a great business at a great price. And when that moment comes, the single most important question we must answer is: How much free cash flow does this business generate?

Why Earnings Per Share Can Be Misleading

Let’s be clear: earnings per share (EPS) is not real money. It’s an accounting number—required by GAAP (Generally Accepted Accounting Principles)—but it doesn’t tell you how much cash the business actually produces.

You can't spend earnings. You can only spend cash.

It’s entirely possible for a company to show strong earnings on paper while having no cash in the bank. In fact, many companies go bankrupt this way. That’s why relying solely on EPS is risky. It’s like looking at a beautifully decorated house and assuming the foundation is solid—without ever checking what’s underneath.

What Is Free Cash Flow—and How to Find It

Free cash flow (FCF) is the actual cash a company generates after it pays for operating expenses and necessary capital expenditures. It’s the money that could end up in your pocket if you owned the whole business.

Let’s say you own a rental house. Each month, you collect rent—that’s your revenue. But out of that, you pay property taxes, insurance, and maintenance costs. Maybe every few years, you repair the roof or upgrade the kitchen—these are capital expenditures. What you’re left with, after all those expenses, is the real income you take home. That’s your free cash flow.

In a business, it's calculated simply by taking the cash from operations and subtracting capital expenditures (you’ll find both on the cash flow statement). This number is far more meaningful than EPS when evaluating the health and value of a company.

Treat Every Investment Like You Own the Whole Company

One of the most powerful mindsets you can adopt as an investor is to treat every investment as if you’re buying the entire business.

Would you be proud to own this company in full? Would your family be proud of the business you chose to partner with?

This mindset changes everything. It forces you to think about the people running the business, how they treat their employees, and whether the company’s mission aligns with your values. It also helps you better understand the business model and whether the company can sustain its cash flow over the long haul.

Remember, about 85% of the money in the stock market belongs to everyday investors like you and me. But that money is often managed by institutions or individuals who don’t share our values. When we choose companies we genuinely believe in—when we vote our values with our dollars—we start to take back control.

From Free Cash Flow to Payback Time

Once you know how much free cash flow a company generates, you can estimate how long it will take to get your investment back—what we call payback time.

Let’s say a company costs $80 per share and produces $10 in free cash flow per share. That means, if nothing changes, you’ll earn back your investment in eight years. If the free cash flow increases, your payback time shortens. If it decreases, it lengthens.

This is why using EPS instead of free cash flow can be so dangerous. You might think you’re getting your money back in five years—when in reality, based on free cash flow, it might take ten. Or worse, you may never get it back at all.

Free cash flow tells you how much real money you can expect to receive. That’s what we care about as investors.

The Takeaway: Certainty, Simplicity, and Values

Investing isn’t about chasing the next hot stock or betting on early-stage companies you don’t understand. It’s about looking for durable, understandable businesses that produce consistent cash flow—and then waiting until they go on sale.

As Warren Buffett put it:

“The value of any business is the cash it’s going to produce from now until kingdom come, discounted back to today.”

Free cash flow helps us see that value clearly. It brings us closer to the real numbers, to the real business, and to investing with both confidence and conscience.

If you want to invest smarter and with more certainty, don’t just look at the earnings. Look at the free cash flow. That’s where the truth lives.