Question

Can free cash flow be a negative number? What does a lack of free cash flow indicate for a business? Please indicate why free cash flow may be a better indicator than Cash Flows from Operating Activities of financial strength.

Answer 1

Free cash flow is cash left after expenditure on capital assets. In other words free cash flow is Operating cash flow- Investing cash flow.

Can free cash flow be a negative number?

Yes Free cash flow can be a negative number.

When operating cash flow is lower than cash used in investing activities the free cash flow is negative number.

What does a lack of free cash flow indicate for a business?

When a business do not have free cash flow it indicates that a company is not generating enough cash to fund its investments. High funds used in investing activities which makes free cash flow negative indicates that the company is not able to generate cash from operations or the company is making unnessesary investments.

Please indicate why free cash flow may be a better indicator than Cash Flows from Operating Activities of financial strength.

Cash investment is required for a business to expand. When a company has positive cash flow even after investing activities it shows that the business has generated enough cash from operations.

Say for example A company has $10000 in operating cash and $0 in investing cash used.

And B company has $ 510000 in operating cash flow and it used $500000 in investing activities. the free cash flow would be same as the A company stated above but B company is financially strong since it has free cash flow of $10000 after investment outflows. Company A is not in a position to do expand.