What does free cash flow measure?

Free cash flow measures the amount of cash generated by a company’s operational activities that is available after accounting for capital expenditures required to maintain or expand the asset base. This concept is essential because it indicates how much cash a company has leftover to fund additional needs such as paying dividends, repaying debts, or investing in new opportunities.

The formula specifically looks at cash flows from operations, which reflect the company's ability to generate sufficient cash from its core business activities, and then subtracts the cash used for capital expenditures, which are necessary investments in property, plant, and equipment. This subtraction gives a clearer picture of the actual cash that can be utilized by the business for growth or returned to shareholders.

In this context, the other choices do not accurately define what free cash flow measures. While equity generated from operational activities reflects profitability, it does not account for capital expenditures. Similarly, total cash available for dividends is a broader metric that could include cash flows beyond just free cash flow, and net cash flow from investing activities only reflects cash movements related to acquisitions and sales of long-term assets, not operational cash generation. Therefore, the best definition of free cash flow is the cash flows from operations less the cash used for capital expenditures.