DCF Analysis
Hi guys
I am learning about DCF analysis. I just have a quick question. The cash flow that you use in your analysis, is it just the operating cash flow or is it the aggregate cash flow (operating + financing + investing)?
Thanks
If I understand your question correctly, what you want is actually Free Cash Flow. You calculate it as follows:
EBIT*(1-TaxRate) + D&A - Capex - Change in net working capital.
That should be pretty self-explanatory, but let me know if you need me to break it down further.
So there's really nothing to do with cash flow from financing activities on the cash flow statement?
Operating Cash Flow 99.9% of the time - CapEx
But if a VP or MD is going to be a dick about it or the industry is unique and requires an academic calculation, you better be able to explain and show both the simplified and more complex versions.
You want Unlevered Free Cash Flows to project out.
To get Unlevered Free Cash Flows- Take EBIT and multiply it by (1-tax rate) then add back Deprec.& Amortization Expense, then subtract CapEx increase (or add back a decrease) from previous balance sheet, and then add back a decrease in net working capital (or subtract an increase) from previous balance sheet ( this last part is also known as plus or minus the change in net working capital.
Note: when calculating the changes in net working capital, you will exclude cash in the Current Assets component, and debt maturing within one year on the Current Liabilities component (in most cases)
You can also deduce Free Cash Flow from Net Income
Unlevered FCF = Net Income + Interest Expense -Net CapEx - Net changes in Working Capital- Tax shield on Interest Expense
(Tax shield = Net Interest Expense * Effective Tax Rate)---N(et CapEx = CapEx- Deprec. & Amortization Expense)
You can also figure it out via Profit after Tax (not Net Income), and if the Debt/Equity ratio is given, you can find simple explanations on that here. Happy modeling
Damn. That's very detailed. I asked my Prof he said the free cash flow used in DCF is the net aggregate change in cash item that is usually found at the end of the Cash flow statement. So you mean to do DCF, we only need the operating cash flow and the capex expenditure part of the investing cash flow and should not bother ourselves with the financing cash flow?
does he appear to have the signs of being a meth addict?
No, financing cash flows are not calculated in free cash flow.
Someone correct me if I'm wrong.
So in free cash flow calculation, only operating cash flow and investing cash flow are considered? Are there any items within operating cash flow and investing cash flow that are omitted in free cash flow calculation?
^ I would say that acquisition CapEx (investing CF) is not included in the calculation of FCF, only maintenance CapEx; I work in Energy and that's how we usually do it.
EBIT - Taxes - Maintenance CapEx +/- W.C.
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