Finance · level 2
Free cash flow build
Four moves from operating profit to cash. Tax it, add back the non-cash charge, then pay for the assets and the working capital the growth consumes.
Worked example: EBIT $140M, tax 25%, D&A $25M, capex $50M, ΔNWC $5M. Unlevered free cash flow?
NOPAT$105M
+ D&A$25M
− capex$50M
− ΔNWC$5M
FCF$75M
Step by step
- 1
Tax the operating profit
$140M × (1 − 25%) = $105M
- 2
Add back D&A
+ $25M — non-cash
- 3
Subtract capex and working-capital build
− $50M − $5M
- 4
Free cash flow
$75M
EBIT $140M, tax 25%, D&A $25M, capex $50M, ΔNWC $5M. Unlevered free cash flow? = 75,000,000
The theory behind it
Intuition
Free cash flow is profit after paying for the growth it needs: EBIT(1−t) + D&A − capex − ΔNWC. Growth consumes cash before it produces it.
Common pitfalls
- ×Forgetting that a working-capital increase is a cash outflow.
- ×Subtracting interest in an unlevered free cash flow.
In the interview
The bridge from an accounting exhibit to a valuation number.