FCFF vs Unlevered FCF - is there a difference?
This may sound stupid but I am confused. I've been learning with a Rosenbaum's book and it states the following:
EBIT - tax + D&A - Capex - change in NWC (when negative then + when positive then -) = FCF
On the other hand, I have a cash flow statement that a friend of mine (who is an investment banker) and he did the following: EBITDA - tax - change in NWC + long-term investments - provisions for accruals - capex = FCFF
Isn't FCF and FCFF the same? Which approach is correct?
Can I just say that FCFF = Cash from from operations - CAPEX?
These two don't reconcile. Where's the flaw? thanks.
Free cash flow to the firm is synonymous with unlevered free cash flow. Unlevered FCF is FCF to the enterprise, i.e., the "firm".
FCFF is not the same as CFO - CAPEX because Cash from operations starts with net income instead of NOPAT, where NOPAT (net operating profit after taxes) is EBIT * (1 - t).
Fuzzy_stocks,
I just wondered... isn't UFCF the cash flow to the firm BUT WITHOUT taking into account financial obligations... and FCFF is the cash available to firm but interest is accounted for. These are not the same, are they?
I see what you're saying. The main discrepancy that I've seen between the two is that UFCF subtracts CAPEX, while FCFF subtracts "long term investments". While the two are mainly the same thing, I would think long term investments would also include not financial obligations, but rather financial assets. The issue I have with that is that free cash flow should really only reflect cash inflows/(outflows) related to the firm's core operations, hence the narrowing to CAPEX instead of including things like investing in bonds or other long-term financial assets.
In any case, it just comes down to semantics and whether or not you want to include cash flows from/(for) investing activities other than CAPEX. I think for most purposes, it makes more sense to ignore those investments, since they aren't directly related to the core business.
Thank you. Since NOPAT = EBIAT, the approach presented in the book seems correct. Nevertheless, I still can't understand his approach. And it leads to a different value.
Oh, now I see. Since he didn't add back the D&A, the EBITDA - taxes can supplant EBIT - taxes provided that we won't add back the D&A later on. The problem seems to be that he added "long-term investments." Is that a correct approach? If yes, why? And why didn't he add "changes in NWC" while these are negative? Thank you!!
I can't say I've ever seen this formula before, but I can tell you that the NOPAT calculation [EBITDA - tax] is wrong. If that were true, it would be analogous to [EBIT * (1 - t) + D&A], as you stated in the first formula. The issue here is that by adding back D&A before multiplying by (1 - t), you are foregoing the tax-shield cash benefit from D&A; instead of being shielded for the full amount, you are now taxing earnings that don't exempt D&A. This causes [EBITDA - tax] to understate NOPAT compared to the correct formula.
Regarding long-term investments, long-term investments in PP&E is the same thing as CAPEX, and that just seems out of place altogether.
I'm also not sure what "provisions for accruals" is, but I would intuitively think that would have already been included in change in NWC, assuming it is referring to accrued current liabilities.
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