Question

Explain (do not use an equation) the concepts of free cash flows and operating cash flows. What do they add to an understanding of corporate performance? How can they be used?

150 words, please.

Answer 1

Operating cash flow is a cash flow which excludes the impact of non cash expenses or income , non opearting income or expenses and changes in the working capital from the company net income. This provides us with the pure cash flow from operations after meeting working capital needs and is not impacted by the non cash costs like depreciation etc.

On the other side, Free cash flow goes one step further where it adds back the non operating cost such as interest expense after taxes in the operating cash flow and deducts the capital expenditure needs. In simple words, the free cash flow is a cash flow available for the equity shareholder, debt holder and preference shareholders after meeting all business needs.

They are very important in corporate performance as they tell us how much cash business is generating from operations which can be invested in assets as well as can be used for dividends etc. This is true measure as the company knows the true performance in terms of cash generated and from free cash flows it can gauge the changes in the companys valuation as this cash is not required for any business purpose so available for shareholders freely.

They are used for the company valuation using discounted cash flow valuation and relative valuation.

the above is answer