Both free cash flow (FCF) and net income are important metrics for understanding a

company's financial health, but they measure different things:

Net Income:

• Represents a company's profitability.

• Calculated by subtracting expenses, taxes, and cost of goods sold from total
revenue.
• Think of it as money earned on paper after accounting for all business costs.
• Net income is a key figure on a company's income statement.

Free Cash Flow (FCF):

• Focuses on a company's cash flow, or the actual amount of cash available.

• Takes net income and adjusts for non-cash expenses (like depreciation), changes in
working capital (inventory, accounts receivable), and capital expenditures (acquiring
new equipment).
• Represents the cash remaining after a company covers its operational needs and
invests in its future.
• FCF is a more nuanced metric, often not directly on a financial statement, but
calculated by analysts.

Here's an analogy: Imagine net income as the profit you earn from selling lemonade
on a stand. Free cash flow would be the actual cash left over after buying
ingredients, cups, and maybe even reinvesting in a bigger stand.

Key Differences:

• Focus: Net income - profitability, FCF - cash flow availability

• Calculation: Net income - simpler formula, FCF - incorporates adjustments from
other financial statements
• Interpretation: Net income - good for overall profitability, FCF - better reflects a
company's ability to meet financial obligations and invest in growth.

In short:

• Net income tells you how much a company earns on paper.

• Free cash flow tells you how much cash the company has available for its needs.