Commercial
Free Cash Flow
Definition
Cash generated by operations after capital expenditure. The measure that shows whether reported earnings are actually converting into money available for debt, dividends or acquisitions.
Key takeaways
- Free cash flow is operating cash flow less capital expenditure.
- It shows whether reported earnings convert into cash, which adjusted EBITDA cannot demonstrate.
- Covenant compliance and credit ratings turn on cash generation rather than adjusted earnings.
- Definitions vary over leases and capitalised development costs, so cross-operator comparisons need checking.
Why it matters
Free cash flow is operating cash flow less capital expenditure, and in the gambling sector it is the number that separates a genuinely cash-generative business from an accounting one. Adjusted EBITDA excludes interest, tax, depreciation and whatever management designates as exceptional, so it can look healthy while nothing reaches the bank. Free cash flow does not permit that gap: it is measured after the capital spending that keeps the business running, which in this industry means platform development, licence and market-access costs and, for land-based operators, property maintenance.
The distinction has practical consequences across the sector. Debt covenants and rating decisions turn on cash conversion, not on adjusted earnings, so a leveraged operator with weak free cash flow faces refinancing risk however good its EBITDA multiple looks. Analysts watch the conversion ratio, free cash flow as a share of EBITDA, for exactly this reason. Definitions vary at the margin, particularly over whether leases, capitalised development costs or acquisition-related spending are treated as capital or operating, so any comparison between two operators should start by checking that both are calculating it the same way.
Frequently asked questions
How is free cash flow different from EBITDA?
EBITDA excludes interest, tax, depreciation and amortisation, and adjusted EBITDA also excludes items management designates as exceptional. Free cash flow is measured after the capital spending the business actually incurs, so it shows cash rather than earnings.
What is cash conversion?
Free cash flow expressed as a share of EBITDA. A low ratio signals that reported earnings are not reaching the bank.
Why does free cash flow matter for a leveraged operator?
Because debt is serviced in cash. Covenants, refinancing and credit ratings all depend on cash generation, not on an adjusted earnings figure.