What effect does an increase in Net Working Capital have on Free Cash Flow?

An increase in Net Working Capital (NWC) typically leads to a decrease in Free Cash Flow (FCF). This is because Net Working Capital represents the difference between a company's current assets and current liabilities. When NWC increases, it often indicates that the company is tying up more cash in its operations, such as through increased inventory or accounts receivable.

This additional investment in working capital means that there is less cash available for the company to distribute to its stakeholders, including shareholders, creditors, and reinvestment into the business. Consequently, the cash flow from operations may decrease, resulting in reduced Free Cash Flow.

Understanding this relationship is crucial for interpreting how operational efficiency and liquidity management can impact a company's financial health and overall valuation.