Question

Suggest alogical answers why free cash flow is not a value-added concept.

Answer 1

Answer:

Free cash flows tends to ignore value addition by outflows while valuing any security. FCF considers only cash flows. But in some cases cash outflow may have value addition attributes. For example if we invest in Investments, this will be reduced from cash flows, but these investments generate some value though return on investment. Same way, a company which invest more in its capital assets may generate more cash in future through it. While in FCF capital expenditure is reduced from flows. it assumes all capital expenditure as necessary for maintaining current cash flows, whereas capital expenditure may include outflow for future growth.

So, its a liquidation concept, where cash flows may be increased by liquidating investments/assets.