Question on FCF calculations
I'm a bit confused about how to calculate FCF. I have seen several different methods online. I am confused about using NOPAT * (1-tax rate) - CapEx vs. using OCF - CapEx as these two methods can result in very different numbers. To me it makes the most sense to use OCF - CapEx since you're looking at actual cash flows in and then subtracting CapEx because you need to reinvest into the business' assets. Can someone clarify this for me?
In your first equation you are forgetting to subtract out change in NWC. OCF has adjustments for changes in working capital accounts. Additionally, after applying the tax rate to NOPAT, you should add back depreciation and amortization as well, given that OCF adds back non-cash expenses as well.
Furthermore, interest expense is included in net income, which is the starting point for deriving OCF if using the indirect method. Interest expense is not subtracted out when calculating NOPAT.
Are you trying to calculate levered or unlevered cash flows?
Another correction: the "NOPAT" term is actually EBIT*(1-t). So in that equation above, you would be applying (1-t) twice.
Thanks for getting back to me. I have seen different equations for unlevered (FCFF), levered (FCFE), and just FCF which is the cffo-capex one. I get the idea in the difference of FCFF vs. FCFE in that FCFF is available to anyone whereas FCFE is what is left after making debt payments which can then be used to pay a dividend or whatever else they want to do, I was just unsure about the generic "FCF" vs. a FCFF or FCFE.
Usually when you see FCF on it’s own, you can assume it’s FCFF aka unlevered cash flow. A lot of finance formulas and terms are surprisingly not standardized, so your confusion is understandable. Luckily, most banks and other FIs have standardized approaches in house to make things easier for employees. We had a huge discussion at work recently about enterprise value vs market value of invested capital, finance is riveting!
Thanks for your response, I know these are just ratios and are not GAAP or any of that sort of stuff where they need to be standardized, that helps a lot!
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