Im working on a DCF and having trouble with add backs for FCF. When calculating FCF, I understand we need to add back non cash-expenses such as D&A. Do we also need to add back one time non cash expenses like impairments and G/L on disposal of assets? In addition, I think deferred income taxes are not core business related expenses. Please correct me if I am wrong.
FYI this is for a case study! Thanks!
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I think some of those non-cash charges you are mentioning are non-recurring so they would probably be left out of the projection model as you really only want to capture core operating cash flow that is somewhat normalized
Some answers for you: - You need to add back all non-cash items to arrive at "cash flow" - doesn't matter regular or one-off - However, usually you start your FCF build-up from EBITDA - so you won't need to add back D&A, impairments, etc. as they are below EBITDA. You only need to add back non-cash operating expenses such as stock-based compensation. You can start with Net Income but that's very uncommon - you need to add back many things - If this is simple case study, I would avoid having anything irregular at all (disposal, impairments) - especially given you are not an advanced modeller. Add one-off items to the model only if explicitly instructed to do so. However, in a real life model any one-offs that are imminent / highly likely should be included in the model simply because it is more precise - Be careful about gains/losses on disposal of sales. Although "gain" or "loss" are accounting concepts and kinda non-cash items, the total amount of proceeds from sale are cash items and should be included in FCF build-up in its entirety
Your title says you're 1st year IBD analyst - are you sure this is correct? There are no fellow analysts around to help? It would be so much more efficient to get a face-to-face walk-through.
Yeah any non-cash or one-time expenses like that need to be added back. With deferred income tax, that's going to be reflected in your NWC line, so subtracting/adding the change in your DTA/DTL. Above post doesn't read like user reallly knows what he's talking about, so I'd take that with a couple grains.
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