Free Cash Flow Calculator (FCFF & FCFE)

Understanding the free cash flow (FCFF and FCFE) — concept and principle

Free cash flow is the cash a business generates after paying for its operations and the investments needed to keep growing. Unlike net profit, it reflects real cash movements: it adds back non-cash charges such as depreciation and subtracts spending on equipment and working capital. This calculator gives two versions: free cash flow to the firm (FCFF), available to all lenders and shareholders, and free cash flow to equity (FCFE), what is left for shareholders alone. Analysts use them in company valuation. It works with any currency.

How it is calculated

• NOPAT = EBIT × (1 − tax rate)
• FCFF = NOPAT + depreciation & amortisation − capital expenditure − increase in working capital
• FCFE = FCFF − interest × (1 − tax rate) + net new borrowing

EBIT is operating profit before interest and tax. D&A are non-cash expenses. Capex is spending on long-term assets. Increase in working capital is extra cash tied up in inventory and receivables net of payables. Net new borrowing is new debt raised minus repayments.

The principle

FCFF asks how much cash the operations produce regardless of how the company is financed. Taxing EBIT as if there were no debt gives NOPAT. Depreciation was deducted to reach EBIT but no cash left the business, so it is added back; cash spent on assets and working capital is real, so it is deducted. FCFE then moves from all investors to shareholders: lenders receive interest, which costs only interest × (1 − t) after the tax deduction, while new borrowing brings cash in.

Worked example

1. NOPAT = 500,000 × (1 − 0.25) = $375,000.00.
2. FCFF = 375,000 + 120,000 − 150,000 − 40,000 = $305,000.00.
3. After-tax interest = 50,000 × 0.75 = $37,500.
4. FCFE = 305,000 − 37,500 + 30,000 = $297,500.00.

How to read the result

Positive and growing free cash flow means a business can fund itself, repay debt or pay dividends. Negative FCF is not always bad: a fast-growing firm may invest heavily now. A single year can mislead, so look at several years, and compare FCF with net income. If FCFE stays well above FCFF only because of new borrowing, the cash is debt-funded.

Common mistakes

• Adding back depreciation twice when starting from net income instead of EBIT.
• Entering a decrease in working capital as a positive number; a decrease releases cash and should be negative.
• Using the statutory tax rate when the effective rate is very different.
• Discounting FCFE at the overall cost of capital; FCFF goes with WACC, FCFE with the cost of equity.

FAQ

Frequently asked questions

What is the difference between FCF and operating cash flow?

Operating cash flow is cash from operations before investment. Free cash flow subtracts capital expenditure, so it shows cash truly free for investors.

Why is interest taxed in the FCFE formula?

Interest is usually tax-deductible, so the true cash cost to shareholders is interest × (1 − tax rate).

Sources: Damodaran, A. — Investment Valuation (Wiley) · Koller, Goedhart & Wessels — Valuation: Measuring and Managing the Value of Companies (McKinsey & Company, Wiley)