Stock compensation costs are non-cash expenses, so they're added back to CF$ (and often to Adj. EBITDA). Given their treatment, why don't we add them back when calculating ULFCF, as we do with D&A (since it's a non-cash expense)?
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it is added back. i remember back when i recruited some guides/sites would say add back d&a and forgot to mention other non cash expenses
What was the guide / do you remember the rationale they gave?
See my other comment for answer to your main question. Regarding guides, they often simplify the explanation of UFCF for DCF as just EBIT * (1-% tax rate) + D&A - CAPEX - Change in NWC = UFCF.
The better way to think about UFCF is that it's the first 2/3rds of the cash flow statement...just excluding after-tax net interest (i.e., interest expense, net of interest income). So the other way to think about it is Cash Flow from Operating Activities minus Cash Flow from Investing Activities add-back After-Tax Net Interest.
EBIT * (1-% tax rate) + D&A [+ SBC] - Change in NWC is an estimate for Cash Flow from Operating Activities plus After-Tax Net Interest. It just assumes all other items aside from D&A and Change in NWC in the cash from operating activities section of the cash flow statement is one-time in nature (i.e., $0 in your 3-statement model). SBC is a unique exception that can be debated.
Similarly, CAPEX is an estimate for Cash Flow from Investing Activities. The other items you commonly see in this section aside from CAPEX (frequently labeled as something like "Purchases of PP&E") are capitalized internal-use software development costs (should be counted as part of CAPEX), purchases and sales of investments (assumed to be $0 in projections most of the time), M&A (almost always a one-time item, assumed to be $0 in projections). Back in the day, there weren't as much of capitalized software, so the UFCF formula in DCFs simplified it to just "CAPEX".
This is an old way to look at it consistent with ~pre-2010 companies that had limited amounts of accounting nuances like SBC. Accounting rules have changed over time, but we still use textbooks that are 10 - 20 years old sometimes...
Aside from D&A, SBC is an item that's debated in terms of whether or not to add back in a DCF. The approach I laid out in my other comment is one protocol. But banks can certainly take the other view that at the end of the day, it's not part of actual cash flow, so it should be added back since it only affects the share price calculation at the end of the day (rather than affecting all of equity value). It comes down to each firm's fundamental views / beliefs.
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