Which of the following best describes free cash flow?

Free cash flow represents the cash a company generates from its normal business operations after accounting for capital expenditures needed to maintain or expand its asset base. It is fundamentally about assessing the cash that is available for distribution among all the securities holders of an organization.

The correct choice indicates that free cash flow is calculated by taking the net cash provided by operating activities and subtracting capital expenditures. This calculation provides insight into how much cash is left over for the company to utilize after fulfilling its necessary expenditure needs.

Understanding free cash flow is essential for investors since it demonstrates how effectively a company generates cash from operations after reinvested necessary for sustaining business growth. This measure is critical because even a highly profitable company can face financial difficulties if it does not maintain a healthy level of free cash flow to cover expenses, pay debts, and return value to shareholders.

The other choices do not accurately capture the definition of free cash flow. For instance, the option describing net cash from investing activities plus operating activities would not account for the capital expenditures that must be deducted to understand actual free cash flow. Additionally, concepts like net income minus dividends paid or cash balances at year-end are irrelevant to the calculation of free cash flow, as they do not provide a comprehensive view of cash generated from