The Free Cash Flow Fiasco: When Capex Consumes All Cash
Cash from operations is merely the beginning. A business’s real cash power lies in its Free Cash Flow (FCF) — the money left after maintaining and expanding the asset base. When capital expenditure (capex) consumes every bit of cash, even profitable companies may spiral toward distress.
“Watson, there’s a difference between building empires and burying liquidity beneath concrete.”
The FCF Formula, and Why It Matters
Free Cash Flow = Operating Cash Flow – Capital Expenditures
FCF represents the actual surplus a company can reinvest, use to repay debt, distribute as dividends, or simply save for a rainy day. A consistently negative FCF isn’t always bad — unless it becomes a permanent state of depletion.
Global Case Studies: When Capex Crushed Cash
| Company | Year | Operating Cash Flow | Capex | Free Cash Flow | Red Flag |
|---|---|---|---|---|---|
| Tesla | 2017 | $3.4B | $4.3B | -$0.9B | Factory build-out overran cash |
| GE | 2018 | $9.1B | $11.2B | -$2.1B | Cash outflows masked by aggressive investment narrative |
| Bharti Airtel | 2019 | $4.7B | $5.5B | -$0.8B | Capex surge in telecom infrastructure |
Forensic Tool: FCF Yield
FCF Yield = Free Cash Flow / Market Capitalization
This ratio reveals how much actual cash a company generates relative to its size. If FCF is negative or shrinking and yield is poor, future dividends or expansion may be at risk.
Visual Clue: Operating Cash Flow vs Capex
Common Capex Fiasco Flags
| Red Flag | Appearance | Reality |
|---|---|---|
| Massive Expansion Projects | “Strategic investment” | Overruns & delayed returns |
| High Depreciation Shield | Boosts EBITDA | Masking negative FCF |
| Low Dividend Despite Profit | “Retained earnings focus” | No cash left after capex |
Other Curious Cases
- Netflix (2020): Positive earnings, negative FCF due to content creation capex
- Saudi Aramco: Huge OCF but massive capex to maintain oil output
- Infrastructure-heavy IPOs: Burn through IPO cash with zero free cash left
Detective’s Note 🕵️
- Always subtract capex from OCF to find true cash power.
- Read the footnotes for capital commitments and capex breakdown.
- Check FCF yield trend across years, especially in capital-intensive industries.
- Expansion is not a crime — but expansion without cash discipline is a risk.
“It has long been an axiom of mine that the little things are infinitely the most important.” – Sherlock Holmes