How this calculator works
Free cash flow to the firm is the cash a business generates for all of its capital providers, both lenders and shareholders, after paying for the investment needed to keep operating. Because it is measured before interest, it does not depend on how the company is financed, which makes it the natural cash flow for a discounted cash flow valuation of the whole enterprise. It can be built from several profit lines. From net income, add back after-tax interest and depreciation, then subtract capital spending and the increase in working capital. From EBIT or EBITDA, apply the tax rate directly. From operating cash flow, add back after-tax interest and subtract capital spending, since working capital is already inside operating cash flow.
Formula
From net income: FCFF = net income + depreciation + interest × (1 - tax) - capital expenditure - working capital investment. From EBIT: FCFF = EBIT × (1 - tax) + depreciation - capital expenditure - working capital investment. From EBITDA: FCFF = EBITDA × (1 - tax) + depreciation × tax - capital expenditure - working capital investment. From operating cash flow: FCFF = operating cash flow + interest × (1 - tax) - capital expenditure.
Worked example
EBIT of $300,000 at a 25 per cent tax rate is $225,000 after tax. Adding $80,000 of depreciation and subtracting $100,000 of capital spending and $30,000 of working capital investment gives FCFF of $175,000.
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Frequently asked questions
Why is depreciation added back?
Depreciation is an accounting allocation of a past cash outflow, not a current cash cost. The current cash cost is the capital expenditure line, which the formula subtracts in full. Adding back depreciation and subtracting capital spending avoids double counting.
Why add back after-tax interest when starting from net income?
Net income is after interest, but FCFF is before financing. Adding back interest × (1 - tax) restores the cash that belongs to lenders as well as shareholders. The tax adjustment is needed because interest reduces the tax bill, so the true cash cost of interest is after tax.
Should working capital investment be signed?
Yes. A positive figure is cash absorbed by rising receivables and inventory. If working capital is released, enter a negative number and the formula adds cash back.