Series 79 practice questionmediumFinancial Statement Analysis
Company A’s free cash flow is significantly lower than its net income for several years. Which factor is most likely responsible?
- ADeclining gross margins
- BGrowing deferred revenue balances
- CSignificant increase in accounts receivable
- DHigh capital expenditures✓ Correct answer
Explanation
Why D — High capital expenditures
Sustained high capex reduces cash flow despite healthy net income, while other items are less likely to consistently create large cash flow gaps. Misattributing the cause could impact valuation.
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