How to use the free cash flow calculator
All figures are in millions of dollars, for the same 12 months.
FCFF (to the firm) has two starting points:
- From operating income (EBIT). Enter EBIT and the tax rate from the income statement, then depreciation and amortization, capital expenditure and the increase in net working capital from the cash flow statement. If working capital fell, enter a negative number.
- From cash flow from operations. Enter operating cash flow, the tax rate, interest expense and capital expenditure. Use this route when you are working directly from the cash flow statement.
FCFE (to equity) also has two routes. Start from FCFF and subtract after-tax interest, or start from net income and adjust for non-cash charges and reinvestment. Both routes then add net borrowing: new debt raised minus debt repaid. Add the share count for FCFE per share.
The formulas
FCFF = CFO + Interest × (1 − t) − Capext is the tax rate, D&A depreciation and amortization, Capex capital expenditure, ΔNWC the increase in net working capital and CFO cash flow from operations, which under US GAAP is already after interest paid.
FCFE = Net income + D&A − Capex − ΔNWC + Net borrowingNet borrowing is new debt issued minus debt repaid in the period. Interest is multiplied by (1 − t) because it is tax-deductible.
A worked example
Company A earned operating income of $1,500M. After tax at 21% that leaves NOPAT of $1.19B. Adding back $400M of depreciation and subtracting $600M of capital spending and a $100M increase in working capital gives FCFF of $885.00M. Net reinvestment of $300.00M absorbed 25.3% of NOPAT. The cash flow statement route reaches the same figure: operating cash flow of $1,327M, plus $158.00M of after-tax interest, minus capex, is $885.00M. The simple measure many data sites quote, operating cash flow minus capex, is lower at $727.00M because interest has already been paid out of it.
The company pays $200M of interest, which costs $158.00M after tax, and borrowed a net $150M during the year. FCFE is $877.00M, or $1.75 per share across 500 million shares.
Starting from net income instead gives the same answer: net income of $1,027M, plus depreciation, minus capex and working capital, plus net borrowing, is $877.00M. The two routes agree whenever the inputs come from the same set of accounts.
FCFF at WACC, FCFE at the cost of equity
The rule that matters most is matching each cash flow to the investors it belongs to:
| FCFF | FCFE | |
|---|---|---|
| Belongs to | Lenders and shareholders | Shareholders only |
| Discount at | WACC | Cost of equity |
| Present value gives | Enterprise value | Equity value directly |
| To reach equity value | Subtract net debt | Nothing further |
| Suits | Most companies, especially when debt levels will change | Companies with stable leverage, such as banks |
Discounting FCFF at the cost of equity, or FCFE at WACC, mixes the two and overstates or understates the value. FCFF is the more common choice in a DCF, because it does not depend on how much the company happens to borrow in any one year. The WACC calculator and the CAPM calculator give the two discount rates.
Why net borrowing makes FCFE jumpy
FCFE includes the cash raised or repaid on debt, which changes sharply from year to year. If Company A repaid $300M of debt instead of borrowing, FCFE would fall from $877.00M to $427.00M, although the business itself is unchanged. A single year of FCFE can therefore mislead in either direction. For valuation, analysts usually assume net borrowing that keeps debt at a steady share of the business rather than projecting one year’s figure forward. The “FCFE before net borrowing” result, $727.00M in the example, shows the cash before that swing.
What growth does to free cash flow
Free cash flow falls when a company invests more, which is not always bad news. If Company A raised capital spending to $900M and working capital grew by $250M to support faster growth, FCFF would drop to $435.00M. Whether that destroys or creates value depends on the return those investments earn. Judging a company by one year of free cash flow can punish exactly the investment that builds future value, so look at several years and at what the spending is buying.
Choosing the inputs
- Use normalized EBIT. Strip out restructuring charges, asset sale gains and other one-offs.
- Count leases consistently. Under US GAAP, operating lease costs stay in operating expenses; under IFRS, most lease payments are treated as financing. If you treat leases as debt, treat lease payments as financing too, and include the lease debt in the discount rate.
- Stock-based compensation is a real cost that does not reduce operating cash flow. Some analysts subtract it from free cash flow.
- Acquisitions are a form of capital spending. Ignoring them flatters free cash flow for companies that grow by buying others.
What this calculator does not include
The calculator works on one period at a time and does not project future years. It does not adjust for preferred dividends, which come before common shareholders in FCFE, or for non-controlling interests. Taxes are applied at one rate to operating income; real cash taxes can differ because of timing differences and loss carryforwards. Use the result as the starting cash flow in a valuation, not as a valuation in itself.