I need some help explaining why a profitable, expanding business may have negative free cash flow.© BrainMass Inc. brainmass.com August 15, 2018, 4:24 pm ad1c9bdddf
There are a couple reasons for why this could be the case. First, let's look at the formula for Free Cash Flow:
FCF = EBIT*(1 - Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditures
(where EBIT is Earnings Before Interest & Taxes, and Net Working Capital is Current Assets Less Current Liabilities)
Since the firm is profitable and expanding, its EBIT will be positive. ...
This solution provides an overview of why a profitable, growing company could have negative free cash flows.