Adjusting to Free Cash Flow
All,
I've just started a new job, and a key part of the analysis is bridging historical cash flows and reconciling company's Adjusted EBITDA into Free Cash Flow. I've been having a lot of difficulty figuring out how to make these adjustments without the help of my boss, and even articulating the areas where I am having difficulty is challenging. Here's an example of how I'm supposed to be breaking down/bridging EBITDA:
Non-GAAP Adjusted EBITDA
Less: CapEx
Less: Cash Adjustments to EBITDA
Less: Cash Interest Expense
Less: Cash Taxes
Less: Chg in NWC
Free Cash Flow
Operating Cash Flow - CapEx
If I do the calculation correctly, the Free Cash Flow we calculate after walking down from Adjusted EBITDA should roughly tie to OCF-Capex. Does anyone have experience in reconciling financial statements like this? I spent almost 4 years in banking and it's just not something I've ever done before. If there are any resources that someone could point me towards to get me better at this exercise, I'd appreciate it.
Thanks
Every company calculates adj. EBITDA differently. It looks like you are on the right track. I’d recommend looking at the Non-GAAP to GAAP EBITDA and Net Income reconciliations which are in nearly all 8-k or 10-q or 10-k filings as a starting point. They do most of the work for you. From there determine what portion of the adjustments are cash items vs. non-cash items by using the operating section of the statement of cash flows. Let me know if you have any difficulty.
Most public companies who issue HY will have an EBITDA calc laid out for you in the filings. If you're trying to build to FCF on a historical basis on your own, I would think about what normalized EBITDA and normalized FCF are. That means backing out non-cash and non-recurring expense items on the P&L and better understanding what drove any meaningful swings in W/C or CapEx in any historical years so that you could make a judgement call on if they'd be recurring. The objective of doing this historical analysis is typically trying to understand what the projected FCF should look like.
You guys nailed it, this is exactly what I am trying to accomplish. In cases where there is an EBITDA calc, I have a better chance at getting it pretty much in order. However, when the companies don't list a calc, or report from Net Income instead of EBIT I seem to have trouble figuring out what is included vs. what isn't (i.e., FX Gains and Losses). Is there anything that can make me faster/better at making these adjustments correctly the first time? Like an accounting textbook or some sort of self-help guide? I've read tons of value investing literature / taken online modeling courses but nothing I've come across addresses this specifically.
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