Question

Question 4 Not complete Marked out of 1.00 P Flag question Free Cash Flow The following information is from the financial statements of Evans & Sons. Cash flow from operating activities $1,600,000 Capital expenditures 850,000 Current liabilities, beginning of year 300,000 Current liabilities, end of year 380,000 Calculate the free cash flow, operating-cash-flow-to-current-liabilities ratio, and the operating-cash-flow-to-capital-expenditures ratio for Evans & Sons.

Answer 1

Cash flow to capital expenditures (CF/CapEX) is a ratio that measures a company's ability to acquire long-term assets using free cash flow. Calculate Cash flows from Operating Activities: Given, Current liabilities at the end of the year = 3,80,000 Current liabilities in the beginning of the year = 3,00,000 Total increase in current liabilities = 80,000 If a current liability increases, this is considered a cash inflow because the company has more cash to keep in its business. This is then added to the net income. But since the sum already shows the cash from operating activities, we don't have to do this.] Cash Flow from Operations Cash Flow to Capital Expenditures - Capital Expenditures = 1,600,000/ 8,50,000 = 1.88 The cash flow to capital expenditure ratio, or CF/CapEX ratio, relates to a company's ability to acquire long term assets using free cash flow. The cash flow to capital expenditures ratio will often fluctuate as businesses go through cycles of large and small capital expenditures. A ratio greater than I could mean that the company's operations are generating the cash needed to fund its asset acquisitions. On the other hand, a low ratio may indicate that the company is having issues with cash inflows and hence, its purchase of capital assets. A company with a ratio less than one may need to borrow money to fund its purchase of capital assets.