I got asked this in an interview and it tripped me up. I can get from Revenue to FCF. My thought process is you take Rev - COGS - Operating expenses = EBIT , then take EBIT * (1-tax rate) then add depreciation, subtract change in working capital and capex.
So to go from EBITDA to FCF do you subtract D&A, tax the EBIT, then add back D&A , subtract capex and change in working capital?
Any help would be appreciated.
EBITDA and FCF Formula
EBITDA, operating cash flow, free cash flow and many other formulas are all fair game when it comes to investment banking interviews. Understanding when each is used and how they relate to one another can set you apart from other candidates.
- EBITDA: Operating Income + Depreciation + Amoritzation + Stock-Based Compensation
- Free Cash Flow (FCF): EBIT(1-T) + D&A - Change in NonCash WC - CAPEX
EBITDA to FCF
To get from EBITDA to FCF, the WSO community provides the following answer:
(EBITDA - D&A)(1-tax rate) + non cash adjustments +/- change in working capital - Capex
You add change in working capital if working capital has decreased and subtract if it has increased.
Levered vs. Unlevered Free Cash Flow
One caveat to the above explanation is if you're looking at this from the context of a debt paydown. Most of the time when people talk about FCF, they are approaching it from a valuation perspective and are concerned with unlevered free cash flow. However, if they are interested in levered FCF, then the calculation from EBITDA to FCF would be slightly different.
As WSO user @George_Banker explains, the calculation would be:
EBITDA less cash taxes less cash interest less change in working capital less capex
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