Inventory - Are inventories included in the free cash flow calculation?



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Hi Binny

Your teaching method has been very easy to understand and very endearing indeed.

Further please clarify that for calculating the free cash flow do we have to consider Inventories in the Capex or it only includes Non Current Assets which need to be purchased ??? Please clarify in detail because in most capital intensive industries Capex would definitely be in excess of the current years cash flow ??


3 Answer(s)


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Sridhar, Any amount spend on Capex has to be subtracted from the EBIT to get FCF. FCF measures if a company generates sufficient cash to expand its asset base to enhance shareholder value.

You dont include the entire value of inventories in a period's capex. Only that amount spend towards buying inventory in that period for which you are calculating Capex.

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Sridhar, Thanks for the kind words on our teaching methods. Glad you are enjoying it.

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