Non-Cash Charges = Depreciation + Interest + Tax = 118m + 28m + 124m = 270mĪfterward, you derive the figures that are not immediately available:.Some of the numbers you require are readily available in ABC’s Income Statement: You start by looking for all the figures you need to calculate the FCFF.
#Free cash flow formula finance free#
Your first task is to estimate the Free Cash Flow to the Firm (FCFF) by using the firm’s Income Statement and Balance Sheet: Suppose that you have been assigned to calculate and interpret the cash flow metrics of ABC Company. This is the cash the business earned regardless of its financing structure and financing costs. The cash available to the firm after all of its operating and capital, but not financing, expenses. It nevertheless is a cash flow that has to be reflected to calculate FCFF. The purchase of a large asset will not be reflected in the Income Statement but would instead be capitalized and depreciated over time. An increase in receivables for example means the firm got less cash for its revenue and it needed to use available cash to cover it. So, when adding it back, we need to multiply by (1-Tax Rate) to get a more precise FCFF measure.Ĭhanges in working capital (receivables, payables, and inventory) are not reflected in the Income Statement but do represent real cash flows. However, interest is a tax-deductible expense, and so if we paid no interest, we would have paid more taxes. So, we need to add them back.Īs noted, FCFF disregards the firm’s sources of finance, and so we have to add back the interest expense, which has been already subtracted in the Income Statement. There was no cash paid here but they have been subtracted as an operating expense. How Do You Calculate FCFF?īelow is a summary of the steps you should take and components you need to calculate Free Cash Flow to the Firm:įCFF = Net~Income + NCC + - FCInv - WCInvīy taking the net income straight from the Income Statement, we have already removed most of the operating expenses – COGS, running costs, depreciation, interest, and taxes.Īs we are trying to calculate free cash flow, we need to consider that all the non-cash charges (such as depreciation and amortization) are included in the Cash Flow Statement. In other words, it ignores whether the business is financed by debt or equity and so, the equation for FCFF omits all interest and debt payments. One peculiarity about FCFF is that it calculates free cash flow to the business while completely disregarding the firm’s financing sources. The excess cash is available to the business to spend at its discretion – it can keep it at hand, schedule it for reinvestment, use it to pay off debt, or distribute it to shareholders as dividends. That includes – COGS, running (operating) costs, taxes, working capital, and fixed capital expenditures. In that regard, FCFF is the cash flow available for the business to use after all its operating and capital expenses have been covered. What Is Free Cash Flow to the Firm (FCFF)?įree cash flow is defined as the cash available to a company after operating and capital expenditures are covered. It shows how the business generates cash, what it uses it for, and how it manages its cash balance.Īnalysts can also calculate certain cash flow metrics that will get them even more insight. A firm’s Cash Flow Statement can be an invaluable source of information for any financial analyst.
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