Computing Free Cash Flow to the Firm from Net Income
Free cash flow to the firm (FCFF) represents the cash flow that a company generates in an accounting period, after paying operating expenses and making necessary expenditures. This cash flow represents the return to all providers of capital, whether debt or equity. It can be used to pay off debt, repurchase shares, pay dividends or be retained for future growth opportunities.
The basic calculation is FCFF = NI + NCC + Int (1-T) – FCInv – WCInv
Were NI is net income, NCC is non-cash charges such as depreciation, Int(1-T) is the after-tax interest payments on debt, FCInv is the investment in fixed capital (capital expenditures) and WCInv is the investment in working capital.
Investors may want to further distinguish between investments in fixed capital that represent required maintenance and those that are intended to generate growth.
For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
