Question

discuss what the term "free cash flow" means? How is it calculated? Why is it an important metric?

Answer 1

Free cash flow is a measure of company's financial performance. It is an assessment of amount of cash a company generates after accounting for al the capital expenditures such as building or property, plant and equipment.

Free cash flow is calculated as follows:

Earning before interest and tax(1-tax)+ depreciation+amortisation-change in net working capital-change in capiatl expenditure

it is an important metric because it is a good indicator of the performance of the company. Many investors base their investment decision on the basis of free cahs generated by the company. It shows that company is able to generate cash flows after spending the money requiredto maintain or expand tax base.