What Is Free Cash Flow to the Firm (FCFF)?

Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution after accounting for 澳洲幸运5官方开奖结果体彩网:depreciation expenses, taxes, 澳洲幸运5官方开奖结果体彩网:working capital, and investments. FCFF is a measurement of a company's profitability after all expenses and reinvestments. It is one of the many 澳洲幸运5官方开奖结果体彩网:benchmarks used to c▨ompare and analyze a fir🔯m's financial health.

Understanding Free Cash Flow to the Firm (FCFF)

FCFF represents the cash available to investors after a company pays all its business costs, invests in current assets (e.g., 澳洲幸运5官方开奖结果体彩网:inventory), and invests in 澳洲幸运5官方开奖结果体彩网:long-term assets (e.g., equipment). FCFF includes 澳洲幸运5官方开奖结果体彩网:bondholders and stockholders as beneficiaries when co﷽nsidering the money left over for investors.

The FCFF calculation is an indicator of a company's operations and its performance. 澳洲幸运5官方开奖结果体彩网:FCFF considers all cash inflows in the form of revenues, all cash outflows in the form of ordinary expenses, and all reinvested cash to grow the business. The money left over a🎀fter conducting a🍸ll these operations represents a company's FCFF.

Free cash flow is arguably the most important financial indicator of a company's 澳洲幸运5官方开奖结果体彩网:stock value. The value/price of a stock is considered to be the summation of the company's expected future cash flows. However, stocks are not always accurately priced. Understanding a company's FCFF allows investors to test whether a stock is fairly valued. FCFF also represents a company's ability to pay 澳洲幸运5官方开奖结果体彩网:dividends, conduct share repurchases, or pay back debt holders. Any investor looking to invest in a company's 澳洲幸运5官方开奖结果体彩网:corporate bond or public equity should check its FCFF.

A positive FCFF value indicates that the firm has cash remaining after expenses. A negative value indicates that the firm has not generated enough revenue to cover its costs and investment activities🅘. In the latter case, an investor should dig deeper to assess why costs and investment exceed revenues. It could be the result of a specific business purpose, as in high-growth tech companies that take consistent outside investments, or it could be a signal of financial problems.

Calculating Free Cash Flow to the Firm (FCFF)

The calculation for FCFF can take several forms, and it's important to understand each version. The most common equation is the following:

$\begin{aligned} &\text{FCFF} = \text{NI} + \text{NC} + ( \text{I} \times ( 1 - \text{TR} ) ) - \text{LI} - \text{IWC} \\ &\textbf{where:} \\ &\text{NI} = \text{Net income} \\ &\text{NC} = \text{Non-cash charges} \\ &\text{I} = \text{Interest} \\ &\text{TR} = \text{Tax Rate} \\ &\text{LI} = \text{Long-term Investments} \\ &\text{IWC} = \text{Investments in Working Capital} \\ \end{aligned}$​FCFF=NI+NC+(I×(1−TR))−LI−IWCwhere:NI=Net incomeNC=Non-cash chargesI=InterestTR=Tax RateLI=Long-term InvestmentsIWC=Investments in Working Capital​

Free c💧ash flow to the firm can also be calculated using other formulations. Other𝓀 formulations of the above equation include:

$\begin{aligned} &\text{FCFF} = \text{CFO} + ( \text{IE} \times ( 1 - \text{TR} ) ) - \text{CAPEX} \\ &\textbf{where:} \\ &\text{CFO} = \text{Cash flow from operations} \\ &\text{IE} = \text{Interest Expense} \\ &\text{CAPEX} = \text{Capital expenditures} \\ \end{aligned}$​FCFF=CFO+(IE×(1−TR))−CAPEXwhere:CFO=Cash flow from operationsIE=Interest ExpenseCAPEX=Capital expenditures​

$\begin{aligned}&\text{FCFF}=(\text{EBIT}\times(1-\text{TR}))+\text{D}-\text{LI}-\text{IWC}\\&\textbf{where:}\\&\text{EBIT}=\text{Earnings before interest and taxes}\\&\text{D}=\text{Depreciation}\end{aligned}$​FCFF=(EBIT×(1−TR))+D−LI−IWCwhere:EBIT=E𓄧arnings before interest and taxesD=Depreciation​

$\begin{aligned} &\text{FCFF} = ( \text{EBITDA} \times ( 1 - \text{TR} ) ) + ( \text{D} \times \text{TR} ) - \text{LI} \\ &\phantom {\text{FCFF} =} - \text{IWC} \\ &\textbf{where:} \\ &\text{EBITDA} = \text{Earnings before interest, taxes, depreciation} \\ &\text{and amortization} \\ \end{aligned}$​FCFF=(EBITDA×(1−TR))+(D×TR)−LIFCFF=−IWCwhere:EBITDA=Earnings before interest, taꦑxes, deprecia🧸tionand amortization​

Real World Example of༒ Free Cash Flow to the Firm (FCFF)

If we look at Exxon's statement of cash flows, we see that the company had $8.519 billion in 澳洲幸运5官方开奖结果体彩网:operating cash flow (below, in blue) in 2018. The company also invested in new plant and equipment, purchasing $3.349 billion in assets (in blue). The purchase is a 澳洲幸运5官方开奖结果体彩网:capital expenditure (CAPEX) cash outlay. During the same period, Exxon paid $300 million in interest, subject to a 30% tax rate.

FCFF can b༺🥂e calculated using this version of the formula:

 $\begin{aligned} &\text{FCFF} = \text{CFO} + ( \text{IE} \times ( 1 - \text{TR} ) ) - \text{CAPEX} \\ \end{aligned}$​FCFF=CFO+(IE×(1−TR))−CAPEX​

In the above example, FCFF woul𝓀d be ca♚lculated as follows:

 $\begin{aligned} \text{FCFF} = &\ \$8,519 \text{ Million} + ( \$300 \text{ Million} \times ( 1 - .30 ) ) - \\ \phantom {\text{FCFF} =} &\ \$3,349 \text{ Million} \\ = &\ \$5.38 \text{ Billion} \\ \end{aligned}$FCFF=FCFF==​ $8,519 Million+($300 Million×(1−.30))− $3,349 Million $5.38 Billion​

The Difference Bꦅetween Cash Flow and Free Cash ෴Flow to the Firm (FCFF)

澳洲幸运5官方开奖结果体彩网:Cash flow is the net amount of 澳洲幸运5官方开奖结果体彩网:cash and cash equivalents being transferred into and out of a company. Positive cash flow indicates that a company's 澳洲幸运5官方开奖结果体彩网:liquid assets are ⛦increasing, enabling it to settle debts, reﷺinvest in its business, return money to shareholders, and pay expenses. 

Cash flow is reported on the cash flow statement, which contains three sections 🔯detai𓆉ling activities. Those three sections are cash flow from operating activities, investing activities, and financing activities.

FCFF is the cash flows a company produces through its operations after subtracting any outlays of cash for investment in fixed assets like 澳洲幸运5官方开奖结果体彩网:property, plant, and equipment, and after depreciation expenses, 澳洲幸运5官方开奖结果体彩网:cash flow taxes, working capital, and inte♔rest are accounted for. In other words, free cash flow to the firm is the cash left over after a compan𝓰y has paid its operating expenses and capital expenditures.

Special Considerations

Although it provides a wealth of valuable information that investors appreciate, FCFF is not infallible. Crafty companies still have leeway when it co🔴mes to accounting sl༒eight of hand. Without a regulatory standard for determining FCFF, investors often disagree on exactly which items should and should not be treated as capital expenditures.

Investors must thus keep an eye on companies with high levels of FCFF to see if these companies are under-reporting capital expenditures and 澳洲幸运5官方开奖结果体彩网:research and development. Companies can also temporarily boost FCFF by stretching out their payments, tightening payment collection policies, and depleting inventories. These activities diminish 澳洲幸运5官方开奖结果体彩网:current liabilities and changes to w🗹orking capital, but the i🌌mpacts are likely to be temporary.