Which factor is included in determining free cash flow?

Free cash flow is a critical metric in business finance that represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It is an important measure for assessing a company's financial health and its ability to generate cash from its operations.

Determining free cash flow involves considering all operating needs and investments that a company must manage to continue its business and to invest in new opportunities. This encompasses a broad range of factors, including:

• Operating expenses: The costs associated with running day-to-day business operations.

• Capital expenditures: Investments in fixed assets, such as property, plant, and equipment, which are necessary for maintaining and expanding a company’s operations.

• Changes in net working capital: Adjustments that account for current assets (like inventory and receivables) and current liabilities, ensuring that the company has sufficient liquidity to meet its short-term obligations.

By including all operating needs and investments, the calculation of free cash flow provides a comprehensive view of the cash available to the business after it has covered all these essential expenditures. This aligns with the nature of free cash flow, which aims to show how much cash is truly free for distribution to creditors and shareholders, or for reinvestment in the company.

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