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Calculating What's Left for the Shareholders

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Free Cash Flow

Summary of Free Cashflow method. Abstract

 

Free Cash Flow Formula

 

      Net Operating Profit

-    Taxes

---------------------------------------------------------

=   NOPAT

 

-    Net Investment

-    Net Change in Working Capital

---------------------------------------------------------

=   Free Cash Flow

The Free Cashflow method (FCF) is an expression of the amount of cash that is left over for the stockholders.

How does a corporation make money?

It makes money by operating business units where it manufactures products or provides services. A company generates revenue by selling its products and services to another party. In generating revenue, a company incurs expenses—salaries, cost of goods sold (CGS), selling and general administrative expenses (SGA), research and development (R&D). The difference between operating revenue and operating expense is Operating Income or Net Operating Profit.


The cost of Capital, taxes and FCF

To produce revenue a firm not only incurs operating expenses, but it also must invest money in real estate, buildings and equipment, and in working capital to support its business activities. Also, the corporation must pay income taxes on its earnings. The amount of cash that's left over after the payment of these investments and taxes is known as FCF.


The use of FCF

FCF is an important measure to shareholders. This is the cash that is left over after the payment of all cash expenses and operating investment required by the firm. It is the hard cash that is available to pay the company's various claim holders, in particular the shareholders.

 

For the equation to calculate Free Cashflow see on the left.
 

Book: S. David Young, Stephen F. O'Byrne - EVA and Value-Based Management: A Practical Guide to Implementation -

Book: Aswath Damodaran - Investment Valuation: Tools and Techniques for Determining the Value of Any Asset -

Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide -


See also: Discounted Cash Flow (DCF)  | Internal Rate of Return (IRR)  |  Management buy-out  |  Cost-Benefit Analysis

More valuation methodologies

Keywords

Free Cashflow

Free Cash Flow method

Net Operating Profit

Cost of Capital

Taxes

 

 

 

 

 

 

 

 

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