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Free Cash Flow to the Firm: Four Starting Methods

Estimate FCFF from net income, EBITDA, EBIT or operating cash flow, using consistent depreciation, interest and reinvestment assumptions.

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Calculator inputs

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How to use this calculator

  1. Enter the known values in the units shown. Results update as you type.
  2. Where results are editable, change one to solve backwards. Lock a value to hold it fixed.
  3. Use the worked example to check the method. Reset restores the starting fields.

Use the result with context

Results are estimates for planning and education. Confirm rates, taxes, fees, and legal requirements with the relevant institution or a qualified professional before making a financial decision.

Formula and method

EBIT of 180, tax of 25 percent, depreciation of 20, net capital spending of 40 and a working-capital increase of 30 produce FCFF of 85.

FCFF = EBIT × (1 − tax rate) + depreciation − net capital spending − increase in operating working capital

Worked example

Enter these known values and leave the other values blank.

Start the calculation from
Earnings before interest and taxes (EBIT)
Earnings before interest and tax
180 USD
Tax-rate assumption
25 %
Depreciation and amortization add-back
20 USD
Net capital spending
40 USD
Increase in operating working capital
30 USD
Free cash flow to the firm
85 USD

Assumptions and limitations

  • All figures cover the same period and currency. Depreciation and amortization stand in for noncash charges; other adjustments require a fuller financial model.
  • Positive working-capital change uses cash; a negative change releases cash. Net capital spending may be negative when disposal proceeds exceed purchases.
  • The net-income and CFO methods add back interest after the assumed tax effect. The simplified relationships assume compatible interest classification, ordinary deductibility and no other nonoperating adjustments.
  • Tax ranges from zero to 100 percent. Negative earnings or FCFF are allowed, but applying a tax rate to a loss is a modeling convention, not an automatic entitlement to a tax refund.
  • FCFF is cash available to the firm’s capital providers before financing distributions. It is not equity cash flow, cash in a bank account or a company valuation.

Common questions

Why can working-capital investment be negative?

A reduction in operating working capital releases cash. Subtracting that negative change therefore raises FCFF.

Should all four methods give the same answer?

They do when the starting figures and adjustments follow the same accounting assumptions. Reported statements may require additional reconciliation.

References

Bookify permits signed net capital spending and working-capital changes and constrains the tax-rate assumption to zero through 100 percent.

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