reading about levered free cash flow and am trying to understand it better. is this technically a correct calculation?
EBT(1-t) +D&A + other non cash expenses- capex- change NWC
is there anything wrong with using this formula as opposed to using CFO-capex, which also gets you levered free cash flow?
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CFO - CapEx doesn’t get you to levered free cash flow. It gets you to plain free cash flow - not levered or unlevered (AKA free cash flow to equity and free cash flow to the firm, respectively). Free cash flow represents disposable cash for the business.
LFCF represents the amount of cash left that “belongs” to common equity holders. UFCF represents the amount of cash left that “belongs”’to everyone who had a stake in the firm.
Your equation is kind of correct, but I want to clarify to make sure you don’t get tripped up; you don’t add back every single non-cash expense. For example, you add back SBC in CFO because it’s technically a non-cash expense, but you can’t do this for levered free cash flow. SBC isn’t a true non-cash expense because it causes dilution; if you add it back then you’re saying it has no expense, and it won’t get you to LFCF properly. If you have more SBC in a year, then current common equity holders will “receive” less earnings because there are more people sharing these earnings, so it has a cost. There are other small discrepancies you’ll have to look into for the non-cash expenses.
Free cash flow = CFO - CapEx UFCF = NOPAT + D&A (some other non-cash expenses too but it’s simplest to just say D&A) - CapEx - changes in NWC LFCF = Net income + D&A - CapEx - changes in NWC - mandatory debt payments
Hope this helps.
Thanks so much that helped a lot. But I'm still kinda confused on ur last line. Shouldn't it be adding mandatory debt payments and subtracting additional debt issued?
no because those are financing cash flows. I would actually not include mandatory debt pay down as an item for LFCF. paying down mandatory debt increases the portion of EV that is due to equity, and so similar to the SBC argument, I would think that shouldn’t be a component “expense” of LFCF. but that’s just me. a lot of formulas say to take it out, but from a theory perspective I feel different
Why wouldn't CFO - Capex get you levered free cash flows? I thought that it gets you levered free cash flows because CFOs are calculated by taking Net income (which is already levered as Interest expense has been subtracted out), adding back non-cash charges such as D&A, and adjusting for changes in NWC. All thats left is Capex from CFI to be subtracted out.
That's what I(OP) thought as well. Figured that it gets you to levered and then from there you would just add back tax adjusted interest expense and tax adjusted interest income to get your cash flow independent of all debt
That's not entirely true. CFO - CapEx is free cash flow, not levered free cash flow. CFO adds back certain items that aren't entirely accurate. Like I mentioned earlier, stock based compensation is an example of this. If you get a room filled with 10 associates, they will likely give you a mix of responses on how to calculate FCFEbecause some stuff is up to interpretation, but CFO - CapEx is certainly not the same as FCFE.
Here's a great link from CFI to if you want a deeper explanation of the differences between FCF, FCFF, and FCFE: https://corporatefinanceinstitute.com/resources/knowledge/valuation/fcf…
An even better link from Wall Street Prep to explain the principle: https://www.wallstreetprep.com/knowledge/stock-based-compensation-treat…
You are right. Not sure why the other commenter is getting all confusing about it. Clearly trying to help but seems to be getting outside the scope of what unelected vs levered means.
To get levered FCF, take either of those and subtract mandatory debt payments. Disregard all of the other bad (confusing) advice.
Debt payments as in repayment of principal? That seems to make more sense and is a lot easier of a formula. Thanks
deleted - person below is correct
Your formula is correct. Rarely will anyone question you further. I would expand by adding:
EBT*(1-Tc) + Non-cash Expenses - Change in NWC - CAPEX + New Debt Issuance - Mandatory Debt Repayments
I must be the only one who thought this question was referencing one of Brady's 200 accounts...
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