Free Cash Flow - Alternative Mathematical Formula

Alternative Mathematical Formula

FCF measures

• operating cash flow (OCF)
• less expenditures necessary to maintain assets (capital expenditures or "capex")but this does not include increase in working capital.
• less interest charges

In symbols:

where

• OCB_t is the firm's net operating profit after taxes (Also known as NOPAT) during period t
• I_t is the firm's investment during period t including variation of working capital

Investment is simply the net increase (decrease) in the firm's capital, from the end of one period to the end of the next period:

where K_t represents the firm's invested capital at the end of period t. Increases in non-cash current assets may, or may not be deducted, depending on whether they are considered to be maintaining the status quo, or to be investments for growth.

Unlevered Free Cash Flow (i.e., cash flows before interest payments) is defined as EBITDA - capex - changes in net working capital - taxes. This is the generally accepted definition. If there are mandatory repayments of debt, then some analysts utilize levered free cash flow, which is the same formula above, but less interest and mandatory principal repayments.

Investment bankers compute Free Cash Flow using the following formula:

FCFF = After tax operating income + Noncash charges (such as D&A) - Capex - Working capital expenditures + Interest*(1-t)= Free Cash Flows to the Firm (FCFF)

FCFE = Net income + Noncash charges (such as D&A) - Capex - Change in Non Cash Working Capital + Net Borrowing = Free Cash Flows to the equity (FCFE)

Or simply:

FCFE = FCFF + Net borrowing - Interest*(1-t)