FREE CASH FLOW

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).

Sales
– 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 (**)


= FCF

(*): 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 :

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