Free Cash Flow to Firm (FCFF)

Category

Cash Flow

Units

Currency

Formula

Cash from Operating Activities + Interest Expense × (1 − Tax Rate) − Capital Expenditures

US-GAAP elements

NetCashProvidedByUsedInOperatingActivitiesInterestExpenseIncomeTaxExpenseBenefitPaymentsToAcquirePropertyPlantAndEquipment

Reference

Non-GAAP measure: Regulation G and Regulation S-K Item 10(e)

Source

Reported in SEC EDGAR filings (US-GAAP XBRL taxonomy)

Free cash flow to firm is the cash a company's operations generate after taxes and capital expenditures but before any payments to its capital providers, meaning it is the cash available to both lenders and shareholders together. A common way to calculate it from the cash flow statement is operating cash flow plus after-tax interest expense, minus capital expenditures.

Because it is measured before financing costs, it does not depend on how the company is financed. It is not a GAAP line item and is calculated from figures reported in SEC filings.

The after-tax interest add-back exists because of how US GAAP classifies interest. Operating cash flow, tagged NetCashProvidedByUsedInOperatingActivities in XBRL, already has interest paid deducted, which is a payment to lenders rather than an operating cost. Adding back interest expense, tagged InterestExpense, restores it. The add-back is multiplied by one minus the tax rate because interest is tax-deductible: without the debt, the company would have paid more tax. The rate is often the effective rate, income tax expense (IncomeTaxExpenseBenefit) divided by pretax income. Capital expenditures, usually PaymentsToAcquirePropertyPlantAndEquipment, are then subtracted.

An alternative build starts from operating profit instead: EBIT times one minus the tax rate, plus depreciation and amortization, minus capital expenditures, minus the increase in working capital. The two approaches should land close to each other but rarely match exactly, because the operating cash flow route captures actual cash taxes, stock-based compensation add-backs, and other noncash items that the EBIT route ignores. Some definitions also subtract acquisitions or add back interest income. Always check which version a source uses.

FCFF is the cash flow used in enterprise discounted cash flow models, where it is discounted at the weighted average cost of capital to estimate enterprise value, from which net debt is subtracted to reach equity value. Paired with enterprise value, it produces the EV to FCFF multiple, which compares companies regardless of their leverage. It is especially useful for comparing a heavily indebted company with an unlevered peer, since standard free cash flow penalizes the borrower for its interest.