Free Cash Flow Guide for Business Valuation
Free cash flow measures cash generated by a business after operating needs and reinvestment requirements.
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Use free cash flow to evaluate whether accounting profit converts into cash available for investors, debt service, reinvestment, or valuation.
FCFF is useful for enterprise valuation because it measures cash flow available to all capital providers.
FCFE is useful for equity analysis because it reflects cash flow available after debt financing effects.
Free cash flow can be temporarily distorted by working capital timing and unusual capital expenditures.
Operating profit to free cash flow
A business with $10 million of EBIT, $2 million of taxes, $1 million of depreciation, $3 million of capital expenditures, and $1 million of working capital investment has materially less cash generation than operating income alone suggests.
Key Metrics
Common Mistakes
Frequently Asked Questions
Is EBITDA free cash flow?
No. EBITDA excludes taxes, capital expenditures, and working capital needs.
Which free cash flow should a DCF use?
An unlevered DCF generally uses FCFF; an equity DCF uses FCFE.
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