Associate didn't know how to get to free cash flows in Super Day?
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What bank was this lol
You're the one in the wrong here...lot more common to start with EBITDA on the job
I see. In that case, I'm genuinely curious as to why most of the guides say to use EBIT. Just trying to learn to be honest. I'm recruiting right now, so it would be helpful to know.
In practice it's EBITDA, but the guides say EBIT? Am I right?
D&A is non-cash. So why would you want to include it in your FCF calc? Don't think it's anymore complicated that. I usually think simpler is better in terms of interview technical questions and let the interviewer probe deeper if they want to. I don't remember what the guides say or don't say. But I think it's just as simple as the following:
Unlevered FCF: EBITDA - capex +/- change in net working capital - cash taxes
Levered FCF: EBITDA - capex +/- change in net working capital - cash taxes - cash interest expense - amortization
Edit: For clarification, by amortization I mean amort payments related to debt just so you aren't confusing that with amortization associated with intangibles, etc. in D&A
Edit2: If you really wanted to get simple with it, a lot of banks will frame up the FCF and FCF conversion just as EBITDA less capex in CIMs, although that's more marketing than actual substance
This actually clarifies it. Thank you.
My exact approach for the interview was: NI - COGS - Operating Expenses = EBIT => EBIT x (1- Tax Rate) => Operating Profit after-tax => + Non-cash expenses (D&A) - CapEx - NWC = FCF
But I guess you can simplify things by simply going with: EBITDA - capex - NWC - tax (unlevered). Right?
I think the interviewer might have not heard me when I said "add back non-cash expenses," so it might have been a misunderstanding.
It does sound like he might have jumped the gun on you before letting you go through all of your thinking, but the calc starting from EBITDA is just how most people think about it and practically model a lot of things so he might have just heard EBIT and stopped you right away
My brother in christ... in what world is Net Income minus COGS minus Opex equal to EBIT...
Since when is amort of financing fees a cash payment? Or you mean principal payments?
Either the guides have been wrong and spreading false information, or what you’re saying, cannot be possible.  how are you arriving at unlevered free cash flows by subtracting capex and wc before taking into account of depreciation and tax?
Shouldn’t it start like this?
EBITDA
deduct D/A
Then EBIT*(1-T)
Add back D/A
subtract WC
subtract Capex
= unlevered free cash flows
Lmfao the exact same thing happened to me. Asked me to go from EBITDA to Levered free cash flows. The moment I said OK we are going to deduct depreciation amortization from EBITDA He jumped all over me and said why are you reducing depreciation ? Little did he know my thinking was I was going to go to net income and then add back depreciation and amortization to find my way to levered free cash flows.
The only intellectually honest way to get to unlevered fcf is going from ebit to ebiat and adding back D&A minus capex and increase in nwc. If you just use ebitda you’re understating the tax expense on the firm. unlevered fcf is supposed to be agnostic to capital structure. But interest paid on debt is tax deductible and thus decreases the cash taxes paid, so if we just use ebitda we’re gonna underestimate the tax expense if the firm has any debt. we have to ignore the tax deductible interest expense which is why cash taxes paid on the income statement are lower than the theoretical taxes we use to tax affect ebit and get to ebiat. We go from ebiat and add D&A instead of starting with ebitda to ensure our tax expense is agnostic to capital structure making the UFCF truly agnostic to cap structure.
Thank you for answering this.
Just to give you an idea of my case . My interviewer asked me how to go from EBITDA to levered free cash flows. Similar to OP, I started with EBITDA and then said that I would deduct depreciation and amortization I was immediately stopped questioned why I would do that. My goal is to go from EBITDA to net income by deducting depreciation and amortization ( assuming it’s bedded into Opex), then interest expense, and then true cash paid on EBT after interest expense to get to Net income. Then from that point I would add back depreciation amortization because it’s a non-cash expense, then subtract changes in working capital and capital expenditures, and lastly subtract mandatory amortizations/debt repayments to get to levered free cash flows.
I’m confused as to why he would stop me at EBITDA when the goal of going to leverage free cash flow is to take into account of interest expense, and I can’t do that without reducing depreciation amortization. Is there another way to do this that I’m missing out on? Was I supposed to do this another way?
Why would you add back EBITDA to remove it later?
Because the associate is a clown. Does he not know D&A creates tax shield? D&A creates tax shield so you should subtract it out first to get to NOPAT then adding back D&A. The only way his method would be correct would be knowing how much cash tax should be paid beforehand.
Assuming D&A are embedded in COGS and/or SG&A:
1. Revenue (-) COGS = GP
2. GP (-) SG&A = EBIT
3. EBIT (1-T) = EBIAT
4. EBIAT + D&A (-) CapEx (-) increase in net working capital = unlevered FCF
5. Take out mandatory debt payments for LFCF
if D&A are a separate line item, like in your example, step 2 = EBITDA.
3. EBITDA (-) D&A = EBIT
4. Rest of the calcs are the same as above from EBIT/step 3 onwards
Your interviewer was looking for the answer “I am taking out D&A because of the depreciation tax shield - If you don’t take it out then you would understate cash flow.” Maybe they were testing you or they work in a non-technical coverage group / are just ppt weapons. Or your interview was after they just pulled an all nighter and couldn’t think straight. Can’t really know for sure but need to just keep studying to make sure you can defend your position (respectfully) in the room.
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