I was reading Saul’s knowledge base (Part 2) with respect to evaluating a company by means of free cash flow. Particularly the analog to P/E ratio, market cap/FCF. I’ve done some research to calculate FCF and found it to be rather complicated. Or perhaps it’s just my inexperience. I’ve only been following this board for about 3 months.
From researching the web I think that FCF is Cash from operations (CFO) - CapEx + Net Debt Issued. Looks simple on the surface but when I get into the weeds…
CFO is Net Income + non-cash expenses - change in non-cash net working capital.
Non-cash expenses = depreciation + amortization + stock-based comp. + impairment charges + gains/losses on investments. Etc., etc., etc.
And so on with “change in non-cash net working capital” just to get CFO.
CapEx and Net Debt Issued still loom large to me.
Is there a simpler way to calculate FCF? I feel I’m making this way too difficult.
By the way, and I should have started with this, thanks to all (beginning with Saul) for the unselfish, untiring sharing of incisive analysis coupled with gentle hand-holding.
Free Cash Flow = Cash Flow From Operations - Capital Expenditure
To get a meaningful FCF, the Capital Expenditure figure should only include the sustaining capital expenditure (i.e. that for current operations), and not the expansion capital expenditure (i.e. that for acquiring add-on business operations). Net debt issued definitely should not add to FCF!
The required figures come out of the financial statement.
The above is the simplest formula (only two independent terms), but another method should give the same FCF with more complexity (four independent terms).
Note that there are subtle variations on the FCF above (e.g. unlevered FCF), so there may be several FCF figures. The above formula strictly applied is the levered cash flow.