Final answer:
Free cash flow is the cash a company has after it covers operation-related expenses, capital expenditures, and dividends, and it is a crucial indicator of a company's financial health and growth potential.
Step-by-step explanation:
Free cash flow describes the cash that a company generates after accounting for cash outflows that support operations and maintain its capital assets. It is represented by cash provided by operations less capital expenditures and cash dividends (Option A). This measure is important as it indicates the amount of cash a company has available for reinvestment in the business, paying down debt, or distributing to shareholders. It is a key indicator of financial health because it shows how effectively a company is generating cash that can be used for growth and to enrich shareholders, as opposed to merely covering its expenses.
In more detail, free cash flow takes into account the necessity to maintain or expand the asset base of the company – known as capital expenditures – which is crucial for ongoing business success. Therefore, free cash flow is the remaining profit after expenses, investments, and dividends have been covered. This metric is significant for investors, as it provides a glimpse into the company's financial stability and potential for long-term growth and profitability.