Free Cash Flow to the Firm (FCFF)

Executive Summary

Free Cash Flow to the Firm (FCFF) is a measure of the cash generated by a company’s operations that is available to all investors, both debt and equity holders. FCFF is independent from the firms capital structure and is thus often called unlevered cash flow.

Formula Deep Dive

• (Operating) Taxes: as FCFF is independent from the capital structure, the tax effects of interest expenses should be excluded. Thus, if starting with the Net Income, one therefore needs to add back overall taxes (EBT * Tax Rate) and subtract operating taxes (EBIT * Tax Rate).
• CAPEX: refers to funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment.
• Change in NWC: is the difference in a company’s operating current assets (such as accounts receivable and inventory) and operating current liabilities (such as accounts payable) over a specific period.

The practical use of FCFF lies in its ability to measure a company’s profitability and cash-generating capacity, independent of its capital structure. It is often used by investors and analysts to assess the value of a company, as it represents the cash available to all investors (both debt and equity holders) after covering capital expenditures and working capital needs.

See also:

• Dividend Discount Model (DDM)
• Discounted Cash Flow Model (DCFM)

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