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Profitable Business with Negative Free Cash Flow

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I need some help explaining why a profitable, expanding business may have negative free cash flow.

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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. ...

Solution Summary

This solution provides an overview of why a profitable, growing company could have negative free cash flows.

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