Free Cash Flow to Firm (FCFF)

Intermediate

Also known as: FCFF, Unlevered Free Cash Flow

Free cash flow to the firm (FCFF) is the cash a business generates from its operations, after taxes and the investment needed to sustain and grow it, that is available to all its funders, both lenders and shareholders.

FCFF measures the cash produced by the business itself, before any payments to lenders or shareholders. It is calculated as if the company had no debt, so financing choices do not affect it.

A common calculation starts with operating profit after tax, adds back non-cash charges such as depreciation and amortization, then subtracts capital expenditure and any increase in working capital. For example, if after-tax operating profit is 20 million, depreciation is 5 million, capital expenditure is 7 million and working capital rises by 2 million, FCFF is 16 million.

FCFF is used in discounted cash flow valuation to estimate the total value of a business, its enterprise value. Because the cash belongs to both lenders and shareholders, it is discounted at the weighted average cost of capital.

Subtracting the company's net debt from that enterprise value then gives the value of the shareholders' equity.

Note: Unlevered free cash flow means the same as FCFF. "Unlevered" means calculated as if the company had no debt.

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