Free Cash Flow to the Firm Calculation
Overview
The free cash flow to the firm is defined as
{% Income + depreciation + \Delta provisions %}
{% - capital \, expenditures - \Delta working \, capital %}
Starting from income
- subtract capital expenditures - capital expenditures consume cash, but do not show up as an expense until
they are depreciated. (see depreciation below)
- add back any depreciation for the period - depreciation is a non cash expense. That is, the cash was already spent when
the building or equipment was purchased.
- add back any new provisions that were created during the period (or subtract provision removed) - provisions are
a non cash expense that represents managements expectation of losses that have not ocurred yet.
- subtract changes in working capital - working capital requires cash but does not show up as an
expense (similar to capital expenditures above)
