The free cash flow approach to valuation is used alternatively to dividends, because dividends are discretionary and many firms may choose to not pay out the amount of dividends they could. Free cash flow is a measure of what a firm could pay out if it chose to.

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Free cash flow is a measure of the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It is used in valuation to assess the company's potential for generating cash that could be distributed to shareholders, offering an alternative to dividends which are indeed discretionary and may not fully reflect a company's financial capacity.

The Free Cash Flow Approach to Valuation Is Used Alternatively