Free cash flow (FCF) or free cash flow to firm (FCFF)

Free cash flow (FCF) or free cash flow to firm (FCFF)

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Free cash flow (FCF) or free cash flow to firm (FCFF) is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.

Free cash flow (FCF) is cash flow available for distribution among all the securities holders of a corporate entity. It is useful for investors such as equity holders, debt holders, preferred stock holders, and convertible security holders when they want to see how much cash can be extracted from a company without causing issues to its operations.

Free cash flow can be calculated as follows:

1. Earnings before Interest and Taxes (EBIT) as Base

Free Cash Flow=

EBIT x (1-Tax rate)

+ Depreciation & Amortization

– Changes in Working Capital

– Capital expenditure (CAPEX)

2. Net Profit as Base

Free Cash Flow=

Net Profit

+ Interest expense

– Net Capital Expenditure (CAPEX)

– Net changes in Working Capital

– Tax shield on Interest Expense

where

Net Capital Expenditure (CAPEX) = Capital Expenditure – Depreciation & Amortization

Tax Shield = Net Interest Expense x Marginal Tax Rate