What is free cash flow and what does it tell about a company’s finances?
Free Cash Flow (FCF) is the cash a company generates from operations less expenditures for capital expenditures and other assets. FCF is a measure of profitability, and it tells investors how much cash is available for a company to repay creditors or pay dividends. At many organizations, a Finance Manager may be required to forecast and report on free cash flow. Even if not, it's still important for the candidate to know what free cash flow is.
"Free Cash Flow is a measure of a company's profitability, but unlike net income it focuses on how much cash the company generates from operations after adjusting for spend on capital expenditures and other assets. Cash is king, and free cash flow tells investors how much money is available for dividends and payments to creditors. Low or unhealthy Free Cash Flow would be a concern for many investors."
Community answers are written by other candidates practicing this set. Reading how others frame the same question is one of the fastest ways to sharpen your own.
Anonymous Answer
Free cash flow is the money that is available in the company. Free cash flow to the firm is funds available to pay debt and equity holders, while Free cash flow to equity is available to shareholders for dividends payments. Free cash flow is after deducting planned investments into property.
Chad's Feedback
Good start! You have provided an accurate explanation of Free Cash Flow (FCF). However, make sure you are also addressing the second part of the question in your response by discussing what FCF tells about a company's finances.
