UFCF vs LFCF vs ending cash from cashflow statement confusion
Hi my understanding of calculating UFCF = EBIAT + D&A - CapEx - increases in NWC
LFCF = NI + D&A - CapEx - increases in NWC
but my confusion lies in why these cashflow calculations only consider certain line items from the cashflow statement (D&A, capex, NWC only). How come line items like stock based compensation or changes in noncurrent assets and liabilities are not included in these calculations? Don't these line items also cause changes in the amount of cash?
I would think that since LFCF starts at NI and the starting point of CFO is NI that one can just use the ending cash on the cashflow statement as LFCF but this doesn't seem to be the case, as one still recalculates LFCF even after building out a CF statement?
Bump would really appreciate an explanation!
First of all, UFCF and LFCF are not GAAP terms, they are purely theoretical finance terms. With that out of the way, here is the difference between the 3 terms.
UFCF: The cash flow available to the whole firm (creditors and equity shareholders). This isn't the actual cash flow of the firm, it is the cash flow that is theoretically available for the firm to payout to its creditors or equity shareholders since theoretically, the earnings of the firm belong to its shareholders and its creditors. But in reality, the firm reinvest in itself beyond just CapEx and NWC (D&A is a non-cash expense which is why it is added back, it is not an investment).
LFCF: The cash flow available to the equity shareholders of the firm after paying any debt-related items (interest, principal repayment, proceeds from new issuances of debt). Again, not the actual cash flow of the firm, but the theoretical amount available to equity holders after paying their creditors. A better formula would be UFCF - After-Tax Interest Expense - Principal Repayments + New Debt
Ending Cash Flow on CF: The actual GAAP accounting cash flow of the firm.
Hope this clears things up
Hi this does help clear things up! I always thought of ufcf as cf at a firm level given its use in computing enterprise value via DCF, but as you pointed out, its better to think about it as cashflow to all holders of capital instead of firm's total cashflows. One loose straw I have though is why line items like stock-based compensation or other assets / liabilities not captured in working capital is excluded. Just like D&A, isn't stock based comp not an actual cash expense and so ought to be added back? Likewise, doesn't increases in other assets decrease cash and increases in other liabilities increase cash?
The way I understand it is that other assets/liabilities are not essential to the firms operations, they are more "discretionary"/"non-essential" items for a lack of a better term. When calculating UFCF and LFCF, you are calculating the cash flow available after the firm makes only the essential investments in itself (NWC and CapEx). In regards to stock-based comp, I believe it is actually appropriate to add it back to UFCF and LFCF. The formulas you listed are the basic formulas, and by no means the only ways to calculate UFCF and LFCF. Since many companies do not have stock-based comp, it is generally left out of the basic formula, but many people do add back all non-cash expenses, not just D&A when calculating UFCF and LFCF.
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