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Ratios: Free Cash Flow quiz

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  • What does free cash flow measure in a company?
    Free cash flow measures the cash earned from operations, focusing on cash rather than net income.
  • From which financial statement do you find cash from operating activities?
    Cash from operating activities is found in the statement of cash flows, specifically in the operating activities section.
  • What is the basic formula for calculating free cash flow?
    Free cash flow is calculated as cash from operating activities minus capital expenditures and sometimes minus dividends.
  • What are capital expenditures in the context of free cash flow?
    Capital expenditures are money spent on fixed assets, such as machines and buildings, necessary for business operations.
  • Why might dividends be included in the free cash flow calculation?
    Dividends may be included because they represent cash paid to stockholders, reducing the cash available for other uses.
  • Why is free cash flow important for investors?
    Free cash flow indicates a company's cash-generating power, which is crucial for financing operations and paying dividends.
  • What does negative free cash flow potentially indicate?
    Negative free cash flow can signal low operating cash flows or high investments in fixed assets for future growth.
  • How should investors interpret negative free cash flow?
    Investors should analyze whether negative free cash flow is due to low operating cash flows or high investments for expansion.
  • What is the main focus of free cash flow analysis compared to net income?
    Free cash flow analysis focuses on cash, while net income is an accounting concept based on accruals.
  • What section of the statement of cash flows is most relevant for free cash flow?
    The operating activities section is most relevant, as it shows cash generated from core business operations.
  • How does free cash flow relate to a company’s ability to expand operations?
    Free cash flow represents the cash available to expand operations or pay dividends after necessary investments.
  • What is a sustainable source of cash for a company according to the lesson?
    Cash from operating activities is considered a sustainable source of cash, unlike cash from loans.
  • Why might a company with negative free cash flow still be considered healthy?
    If negative free cash flow is due to high investment in fixed assets for future growth, the company may still be healthy.
  • What should you check with your professor regarding the free cash flow formula?
    You should check whether your professor includes dividends in the free cash flow formula or not.
  • What is the significance of cash in financial analysis, as mentioned in the lesson?
    Cash is considered 'king' in financial analysis because it represents real, usable resources for a company.