Free CashFlow to Firm (FCFF)
Free Cashflow to Firm (FCFF) is the actual cash that a company can keep for itself. A business can decide to invest, keep for future use or distribute to its shareholder.
FCFF is the measurement of a company’s profitability and thus one of the most important parameters for calculating the intrinsic value of a business.
In general, an easy way to calculate FCFF is by tasking the Operating Cashflow (EBIT) of a business and then deducting all operating expenses, tax, capital expenditure, change in working capital and adding back any Amortization & Depreciation.
|Earnings before interest and tax (EBIT):
|Add back: Depreciation and Amortization
|Minus: Working capital increases:
|Minus: Working capital increases
|Minus: capital expenditure
|Free cash flow to the firm (FCFF)
In our calculator, we used the following formula to calculate FCFF
- CFO is Cashflow from operation. This is the net cashflow provided by general business operations. You can find the CFO of the business in the cashflow statement.
- CapEx is Capital Expenditure. Businesses need to spend money to be able to operate. som capital expenditures could be buying property and/or plants. You can find the CapEx in the cashflow statement.
- You can find the Interest expense in the income statement.
- TaxRate is the effective Tax rate paid by the business during this year. The effective tax rate can vary year over year. You can find effective tax rates in the annual report of the business or you can go to a data provider like morningstar.com to find Tax rates and other financial data easily
FCFF gives us the total available cash for the business which includes both debt investors and equity investor.
If you want to buy stocks of a business and become equity investor then knowing Free Cashflow to Equity could be useful for you. FCFE tells you the cashflow availble to only the shareholders- You can use our Free cahsflow to Equity (FCFE) calculator before you make your investment decision.