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Why FCFF Cannot Be Derived Directly from the Cash Flow Statement

Article Quant Q&A · Author: doublefelix
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Summary

The document distinguishes free cash flow to the firm (FCFF) from the simpler free cash flow measure often calculated as operating cash flow minus capital expenditures. FCFF represents cash available to all capital providers under a hypothetical unlevered company, while cash flow statement measures reflect the company’s actual financing and cash flows.

Because FCFF removes the tax benefit associated with interest expense, its calculation requires income statement information, including interest and taxes, that the cash flow statement alone does not provide. The discussion offers a conceptual explanation rather than a full worked calculation or detailed treatment of accounting adjustments. Its main limit is that it does not specify how to estimate the tax rate or reconcile each FCFF component in practice.

Key ideas

  • FCFF estimates cash available to capital providers as if the firm had no debt.
  • Cash flow statement free cash flow and FCFF measure different things.
  • Calculating FCFF requires income statement information, including interest and taxes.
  • The cash flow statement alone cannot show the hypothetical tax effect of removing debt.

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# How to calculate FCFF starting from the cashflow statement?


# How to calculate FCFF starting from the cashflow statement?












I'm looking to get a better intuition for FCFF (free cashflow to the firm) as used in discounted cashflow analyses.

The usual equation for FCFF starts from earnings (an accrual accounting metric) and makes modifications to ultimately end up with a quantity of cashflow (a cash accounting metric): $$FCFF = EBIAT - CapEx + DA - \Delta(NOWC)$$ Where $DA$ is depreciation & amortization, and $NOWC$ is net operating working capital. Notably, in the context of DCF analysis, $NOWC$ doesn't include cash. I would love to see a direct, additive calculation of this similarly to how operating cashflow can be calculated both directly and indirectly. It would be great to check my intuition.

Is there an equivalent definition for $FCFF$ starting from the cashflow statement, for example starting from Operating Cashflow and adjusting from there, or just building up additively from $0$? The closest thing I've seen is to calculate $FCF=\text{Operating Cashflow} - CapEx$, but this source suggests that that is not the same metric.

## Answer by D Stanley (score 0)

https://quant.stackexchange.com/a/84012

No - FCFF requires information from the income statement that cannot be obtained directly from the CF statement.

FCF is different since it essentially measures the about of cash flow that is "free" to use for discretionary purposes (paying back debt, giving to shareholders, etc.), all of which can be obtained from the cash flow statement.

FCFF is the cash that would be "free" to use if the company had no debt. It does this by eliminating the tax savings from interest payments. Since it's hypothetical and not based on actaul cash flows, it must be recomputed using income statement items (interest, tax rate, etc.)

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.