Free Cash Flow to Firm Calculator

Free Cash Flow to Firm

It is the cash flow available to the company after considering all the expenses whether revenue or capital. Further, this is the cash flow available for all the capital providers of the company. The capital structure of a company includes share capital and debt capital. This means that the capital providers of the company are debt holders and shareholders. Hence, free cash flow to the firm belongs to all those who fund the capital of the company. Free cash flow to firm calculator calculates the cash flow available for these capital providers.

This concept of free cash flow to firms is generally used in the process of valuation at the time of mergers and acquisitions.

Formula

To calculate free cash flow to the firm, we use the following formula:

Free Cash Flow to Firm = Cash Flow from Operations – Capital Expenditures

To simplify the above formula, cash flow from operations can also be written as:

Cash Flow from Operations = EBIT * (1 – Tax Rate) + Non-Cash Items – Working Capital Changes

Therefore, we can also write the above formula of free cash flow to the firm as:

Free Cash Flow to Firm = EBIT * (1 – Tax Rate) + Non-Cash Items – Working Capital Changes – Capital Expenditures

Free Cash Flow to Firm Calculator

Calculator

How to Calculate using Calculator?

Simply enter the following data into the free cash flow to the firm calculator to get an instant result of free cash flows available with the company.

EBIT

EBIT stands for earnings before interest and tax. This refers to income generated by the company before making payment of interest to debt holders and taxes.

Tax Rate

Enter the rate of tax applicable to the earnings of the company.

Non-Cash Items

There are some transactions that the company does not incur in cash but still records them in the statement of income and expenditure. These may include depreciation or amortization, unrealized gain or loss, provisions, etc. Due to such transactions, the profit of the entity does not reflect the actual cash flows. Hence, these non-cash items are to be added back into the profit to arrive at the cash available to the company.

Working Capital Changes

Working capital changes determine the increase or decrease in the working capital of the current period in comparison to the previous period and that affects the available cash flow.

Capital Expenditure

Capital expenditure includes any investment made by the company in fixed assets. The expenditures whose benefit is going to be availed by the company for more than one year period are treated as capital expenditures, usually.

Example

Let us illustrate this concept for more clarity. The earnings of the company before interest and tax is $1,200,000 for the last quarter. The company had purchased a machine of $500,000 and the depreciation amount to $70,000. The company’s working capital investment was $120,000. The tax rate of the company is 30%.

Free Cash Flow to Firm = 1,200,000 (1 – 0.30) + 70,000 – 120,000 – 500,000 = $290,000

Explanation

As said above, the free cash flow to a firm is the cash flow for the capital providers of the company. In the example above, it is $290,000. This defines that the whole profit is not the cash flow of those who provide funds to the company. The amount left after making investments in fixed and working capital and incurring any other expenditure is the cash flow that belongs to these funds providers. In short, Free Cash Flow to Firm is a combination of Cash Flow from Operations as well as cash flow from Investing Activities.

Excel Calculator – Free Cash Flow to Firm

You can also download our excel based calculator for free cash flow to firm.

Excel Calculator for Free Cash Flow to Firm (32 downloads)