Hey everyone, I was actually watching a podcast where the person (hedge fund manager) uses the Net Income instead of FCF in DCF modeling. He says they are equivalent in the long run. Is this true?
What are your thoughts?
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I do not think it is true because FCF is closer to Operating Income or NOPAT than net income.
Of course it's true, but in the long-run, a lot of things are true. I guess more context is needed. Maybe this manager has a long-only and mature company approach.
well free cash flow = net income + depreciation +/- change in working capital - capex
what he is saying is essentially in the long run
CAPEX = Depreciation, which is true, when your company declines and ends, you will fully depreciate your pp&e,, which you built up through capex
Working capital fluctuation will end up equaling 0, which is true because you will liquidate all your accounts receivables and inventory and pay back all your accrued expenses and settle all your accrued expenses when your company ends
so you have free cash flow = net income +/- change In working capital, which equals 0 in the long run (+ depreciation - capex, which equals 0 in the long run)
so FCF = net income
FCF to the firm calculation starts with after-tax EBIT though, so just to clarify what you're equating is FCF to Equity by starting with net income and thus incorporating interest payments.
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