Free Cash Flow Formula
Net Operating Profit
-
Taxes
---------------------------------------------------------
=
NOPAT
-
Net Investment
-
Net Change in Working Capital
---------------------------------------------------------
= Free
Cashflow (Free Cash Flow) |
The Free Cashflow
(Free Cash Flow) method 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 Free Cash flow
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 Free Cashflow (Free Cash Flow).
The use of Free Cash Flow
Free Cashflow (Free
Cash Flow method) 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 (Free Cash Flow) method 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
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