MANUAL OF FINANCIAL CONCEPTS
FREE CASH FLOW
It is the remaining amount available to cover debt service (interest + principal) of the company and to distribute to the shareholders, after investments in fixed assets and working capital needs (WCN).
– Cost of goods sold
– General and administrative expense
= Gross operating margin (EBDIT)
– Depreciation (*)
= Profit before interest and taxes (EBIT)
– Income tax
= Net profit before interest (EBI)
+ Depreciation (*)
– Investment in fixed assets
– Investment in WCN (**)
(*): Depreciation is added back because it is a non cash item.
(**): Working capital needs (WCN) = Receivables + Stocks – Payables.
If we bring to present value the FCF, using as the discount rate the cost of capital of the company, we get the value of the company.
Example of FCF calculation :