What is the correct relationship between Free Cash Flow and Net Operating Cash Flow?

What is the correct relationship between Free Cash Flow and Net Operating Cash Flow?

• A. Free Cash Flow equals Net Operating Cash Flow minus Capital Expenditure
• B. Free Cash Flow equals Net Operating Cash Flow plus Capital Expenditure
• C. Free Cash Flow equals Net Operating Cash Flow minus Taxes
• D. Free Cash Flow equals Net Operating Cash Flow

Answer: (B)

Free Cash Flow shows the cash a company has available after funding the ongoing investments needed to maintain or grow its asset base. Cash flow from operations measures the cash generated by core business activities, and capital expenditures are cash outflows for property, plant, and equipment that keep those assets productive. To see how much cash is truly free to return to investors or to repay debt, subtract CapEx from the cash provided by operations. In other words, Free Cash Flow = Net Operating Cash Flow minus Capital Expenditure. For example, if operations generate 100 and CapEx is 30, free cash flow is 70. Subtracting CapEx accounts for the reinvestment needed to sustain the business, leaving the cash that’s truly available.

Free Cash Flow shows the cash a company has available after funding the ongoing investments needed to maintain or grow its asset base. Cash flow from operations measures the cash generated by core business activities, and capital expenditures are cash outflows for property, plant, and equipment that keep those assets productive. To see how much cash is truly free to return to investors or to repay debt, subtract CapEx from the cash provided by operations. In other words, Free Cash Flow = Net Operating Cash Flow minus Capital Expenditure. For example, if operations generate 100 and CapEx is 30, free cash flow is 70. Subtracting CapEx accounts for the reinvestment needed to sustain the business, leaving the cash that’s truly available.