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Free Cash Flow (FCF) - Meaning, Formula, Examples, Calculation - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of Wallstreetmojo friends today we are
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going to learn a concept that is a free
cash flow concept a free cash flow
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concept as you can see in this
screenshot the calculation has been
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given to us how the things have been
calculate this is the year okay the
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amount of the net income and you
reduction iike (CAPEX) any changes in the
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walking capital you add back based on
that you get the free cash flow to the
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firm and then you discount with the
help of the cost of capital with the
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with terminal value you get the final
cash flows so this is just a screenshot
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but how it is calculated let's get in
the nitty-gritty of the same the free
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cash flow is basically a measure of how
much how much the cash a company generates
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after accounting for required working
capital and capital expenditure
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that is called as (CAPEX) of the company it is the measurement of
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the company's financial performance and
health the more FCF the more free
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cash flow that the form a company have
the better it is and it is a financial
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term you can say and it is the financial
term which truly determines what X what
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is exactly available to distribute among
the security holders of the company so
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FCF can be tremendously useful measure
for understanding the true profitability
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and of any business it's harder to
manipulate and it can tell a much better
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story of the company than more commonly used metric like profit after tax so
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free cash flows of the form and we can
start with the meaning we start with FCF
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is nothing but a portion of the cash
that remains in hand of the company
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after paying of all the (CAPEX) acts like
purchasing new machinery equipments land
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and building and satisfying all the
working capital needs like account
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payable so FCFF is calculated
from the cash flow statement CFS
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of the company a business you can say
which which generates a significant
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amount of cash after a short interval is
is considered to be the best business
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than other similar businesses as you
have to pay all your routine Bill like
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bills like salary rent office expenses
in cash only and you can't bear it from
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your net income so thus its business ability to generate cash
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that really matters to the stakeholder
especially those who are more worried
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about liquidity okay liquidity of the company then its
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profitability like the most important
ones these suppliers always haunting
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around a company with sound working
capital management provides strong
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resilient and sustainable liquidity
signals and FCFF is one of them and
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it's actually the top of that hence in
corporate finance you can say in CFD
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corporate finance and most of the
projects you are selected on the basis
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of their timing of their cash flows
inflows and outflows rather than its net
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income because the income statement
includes all the cash as well as the
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non-cash expenditures like depreciation
amortization
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however this non-cash expenditure not
the actual outflow of the cash for that
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particular period so it doesn't make
sense let's understand the free cash
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flow formula the formula for the free
cash flow goes something like this free
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cash flow is equal to
you're operating cash flow that is your
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operating CF oh okay less - you will have to do (CAPEX) that is
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your capital expenditure so you
operating cash flow - the capital
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expenditure now let's say we have this
data over here a balance sheet
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liabilities and income statement over
here so what is going to be the step by
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step approach the first step is going to
be we'll say the cash flow from the
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operation okay the cash flow from the
ops that is the operation cash flow from
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the operation is the sum total of the
net income and the non-cash expenses
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like depreciation amortization in
addition we had the changes in the working
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capital also and you need to note
something over here that this change in
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the working capital could be positive
and it could be negative it can be in
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both the direction so therefore the cash flow from the
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operation is equal to your net income
that is NI plus any non-cash expenses
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and plus or minus you will have any
changes in the working capital in WC
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working capital right now your step two
is going to be like you know you have to
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find out the non-cash expense right now
non-cash expense is includes
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depreciation amortization here in income
statement as you can see we have only
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depreciation over in line right so
figures provided will assume that
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amortization is 0 the step 3 is
in our calculation is going to be we
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have to find the changes in the working
capital
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so our changes in the working capital
will be something like this see you have
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your account receivable right 90 then
you have 45 in the previous
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year 45 19 2008 same for the
inventory that is 90 and 120 so the
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difference of the cash impact is over
here and you have the next thing that is
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accounts payable which we still have
over here
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60 and 60 so there'll be no change
so this is your change in the working
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capital 75 once you do that we
see from the above there is a change in
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the working capital in 2007-08 plus inventor of 2007-08
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and the accounts payable so the changes in the
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in the working capital is going to be
negative 75 and this means that there
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has been a cash outflow of cash outflow
of minus $75 due to
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change in the working capital now the
4th step is going to be find out the
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capital expenditure that is a CAPEX now
since we are not provided with the cash
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flow statement we'll use the balance
sheet and the income statement to derive
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this figure figures and there are 2
ways to calculate the CAPEX first
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either use the gross approach or that is
the gross approaches as simple as that
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you have the total asset cross PPV is
1200 minus 900 so you will have the
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gross a property plant equipment as $300
you need to note that this is a cash
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outflow so it should be negative in 300
right and the capex that is a change in
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the net PPE plus depreciation and
amortization of 2008 minus 7
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plus any depreciation and amortisation so it's going to be 1200
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- 570 - 900 - 420
which will give you your 300 as your
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outflow and you need to note that this
is the cash outflow again I'm repeating
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now the step five that we have in line
is combine all the components as simple
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as that in the FCFF formula so we can combine
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the individual elements to find out the
FF FCA formula and calculate the free
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cash flow the free cash flow is over
here as simple as that the net income
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plus any depreciation amortization any
changes in the working capital okay that
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is your account receivable inventory and
account payable okay and you need to
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reduct that is the net property plant
and equipment
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that is and you need to add back any
depreciation and amortisation hence you
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will have the answer something like this
is equal to 168 your net income plus 150
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as your the second term 150 - 75
less 300 so your FCFF is going to FCF
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is going to be $7 now there are two kind
of FCF if one is called the free cash
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flow to the firm FCFF FCFF simply
means that the ability to use two
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ability of the business to generate cash
netting of all its expenditure and one
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can calculate the FCFF using the
cash flow from the operations or by
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using net income of the company the
formula is quite simple FCFF is equal
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to your cash flow from operation less
any CAPEX okay and the next is second
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this is the first method you have second
type of cash flow that is FCFE which I
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discussed in the very beginning that is
free cash flow from the equity and is
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it's a cash flow available for the
equity holders of the company the amount
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shown how much shows how much the cash can be distributed to the equity
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shoulders of the company as dividend or
stock buybacks after all the expenses
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reinvestments and the debt repayments
are taken care of so the FCFF is also
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called as the levered free cash flow
right and the formula is again the same
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the FCFF is equal to FCFE is equal to
your free cash flow from the form plus
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any net borrowings or net debt less any
interest and it will be post tax that is
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1 minus tax thank everyone
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