Free cash flow to the firm

Cash available to all providers of capital, calculated before interest: operating profit taxed as if there were no debt, plus depreciation, less capital spending and the increase in working capital.

Example

Operating profit of 1,600,000 taxed at 25% gives 1,200,000; plus 400,000 depreciation, less 500,000 capital spending and 100,000 of working capital, is 1,000,000.

Important

Discounting this produces an enterprise value, from which net debt must be subtracted. Discounting cash measured after interest produces the equity value directly, and mixing the two is wrong by an amount nothing in the arithmetic reveals.

Related terms

• Enterprise value — The value of the whole business - what lenders and owners together have claims on. Equity value plus net debt.
• Discounted cash flow — Valuing an asset as the money it will produce, with each future amount reduced to reflect that money arriving later is worth less than money arriving now.
• Free cash flow — Operating cash flow less capital expenditure - what is left after the business has funded both its trading and the assets it needs to keep running.

Lessons that explain it

• Discounted cash flow: the method that shows its assumptions — A discounted cash flow states every assumption out loud, which is its great virtue and the reason it is so easy to abuse. The output moves enormously on inputs that cannot be observed. (14 min)

All 578 terms in the Investing glossary