Question

What is the difference between net earnings and free cash flow (meaning compare what information can be assessed from each one and how they are similar and/ or different)? Explain your answer in words.  

Answer 1

The free cah flow shows the amount of cash that the company accounts for after accouting for the cash outflows for the support of the capital operations and the balance sheet . It is a measure of profitability also known as Capex. It is used in the DCF analysis of the stock. The FCF includes the spending and the income and thus excluding the non cash expenses.

The net earningsshows the amount of sales after deducting all the operating expenses ,interest taxes and the preferred stock dividends etc. It is calculated by the formula sales - cost of goods sold, general expenses ,depreciation expenses , administration expenses etc

The net income is important to find the free cash flow as the net income is calculated in the income statement which further become the basis of calculation of FCF.