Free Cash Flow to the Firm - FCFF | Explained

What is FCFF?

Free Cash Flow to the Firm or FCFF is the cash flow i.e. available to all the stakeholders of the business i.e Equity shareholders, Debt holders, Preference shareholder, Convertible bondholders, Stock option holder, etc.  It is used to determine the Enterprise Value (EV) of the firm.

FCFF is the actual cash flow left after paying off all the business expenses and accounting for depreciation expenses, taxes, working capital changes and investments.

A positive free cash flow means a company has a sound financial health as compared to its peers. Such companies are considered cash rich companies. While a negative FCFF indicates, the company is not able to generate enough revenue to cover up its expenses and investment activities

 

Calculations:

There are three ways to calculate FCFF depending upon the type of entity, if it’s a listed entity, than it is easy to get the data from its financial statements and thus formula no. 1 is the first choice, however if it’s a private company, we don’t have enough information about its financial and thus we could use the remaining formula to calculate the FCFF of the company

 

1) FCFF = NOPAT + D&A – CapEx – Δ Net WC

NOPAT : Net operating profit after taxes = EBIT (1- tax)

D&A : Depreciation and amortization expense (Since this are non cash expenses, we add them back) 

CapEx : Capital Expenditure (We can find this in the Cash flow statement under the head “ Cash flow from investing)

Δ Net WC : Changes in Net working capital = Current year Working capital – Previous Year Working capital

 

2) FCFF = CFO + Interest (1 – Tax) – CapEx

CFO : Cash flow from operation

 

3) FCFF = NI + Interest (1-Tax) + D&A – CapEx - Δ Net WC

NI : Net Income

 

Example: Infosys Limited

If you found it useful than do share with your friends and also let us know in the comment section if you have any query.

Do follow us on telegram for regular updates: Telegram Link

 

Check out our Equity Research / Financial Modeling Series: Click Here

Thanks for reading

The Finance Magic

• Tweet
• Share
• Share
• Share

About The Finance Magic

We're dedicated to providing you vast investment knowledge, with an emphasis on making you understand the "WHY" in finance. Our aim is to spread financial literacy and show you how magical the world of finance is?

Related Post