Free cash flow (FCF)and net income (NI)differ in the following ways:
I.Net income accrues to shareholders,calculated after interest expense; free cash flow is calculated before interest.
II.Net income is calculated after various noncash expenses,including depreciation; FCF adds back depreciation.
III.Capital expenditures and investments in working capital do not appear in net income calculations; they do reduce free cash flows.
IV.Net income is never negative; free cash flows can be negative for rapidly growing firms,even if the firm is profitable,because investments can exceed cash flows from operations.

Question

Quizplus · Accepted Answer

Net income is calculated after interest and noncash expenses like depreciation, while FCF is before interest and adds back depreciation. Capital expenditures and working capital investments reduce FCF but not net income. However, net income can be negative, so IV is incorrect.

Free Cash Flow (FCF)and Net Income (NI)differ in the Following