Question

Look at the most recent Kroger (KR) 10-Q (for the quarter ended 8/17/19). What is free cash flow? (defined as net cash flow from operations minus capital expenditures). What were the primary uses of their free cash flow?

Answer 1

Solution :

Free cash flow can be a tremendously useful measure for understanding the true profitability of a business. It's harder to manipulate and it can tell a much better story of a company than more commonly used metrics like net income.

Free Cash Flow : Free cash flow is the net change in cash generated by the operation of business during a reporting

period, minus cash outlays for working capital, capital expenditure, and dividends during the same period. This is a

strong indicator of the ability of an entity to remain in business, since these cash flows are needed to support operations

and pay for ongoing capital expenditures.

Uses of Free cash Flow :

The free cash flow model is important because it is an indicator of the financial health of a business, and particularly of its ability to invest in new business opportunities. The model is also used by investors to estimate the amount of cash flow that may be available for distribution to them in the form of dividends. However, there can be a variety of situations in which a company can report positive free cash flow, and which are due to circumstances not necessarily related to a healthy long-term situation. For example, positive free cash flow can be caused by:

• Selling off major corporate assets
• Cutting back on or delaying capital expenditures
• Delaying the payment of accounts payable.
• Accelerating receivable receipts with high-cost early payment discounts.
• Foregoing a dividend
• Cutting back on key maintenance expenditures.
• Reducing marketing expenditures
• Curtailing scheduled pay increases
• The receipt of a large advance payment from a customer
• Entering into sale and leaseback arrangements for key assets