Compute Free Cash Flow Without Forgetting Capex
Calculate free cash flow from operating cash flow and capital expenditures, then interpret the result.
A manufacturer reports $76 million of operating cash flow and $64 million of capital expenditures. Management says cash generation is strong. Free cash flow = operating cash flow minus capital expenditures Stopping at operating cash flow can overstate flexibility when the business must reinvest heavily just to keep earning. Start with operating cash flow Operating cash flow = $76 million. This is the cash generated from core operations after working-capital effects. Subtract capital expenditures $76 million - $64 million = $12 million. Capex is an investing cash outflow, but it is still cash needed to sustain or grow the business.…
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