financial-metrics
Free cash flow is the cash operations can distribute after tax and reinvestment. FCFF (unlevered) is cash to all capital providers; FCFE (levered) is cash to equity after debt service and net borrowing.
Free cash flow is not "EBITDA minus a bit" and not the bottom line of the statutory cash-flow statement (though IAS 7 is where you go to audit the pieces). It is a constructed flow: after-tax operating profit, plus non-cash charges, minus the reinvestment required to deliver the forecast.
Two claims, two flows:
FCFF = EBIT × (1 − t) + D&A − capex − ΔNWC (± provisions, SBC, etc., applied consistently)
FCFE = FCFF − interest × (1 − t) − principal repayments + new debt (or from net income: NI + D&A − capex − ΔNWC + net borrowing)
FCFF is discounted at WACC to enterprise value. FCFE is discounted at the cost of equity to equity value. CFA and Damodaran both treat mixing the pairs as a first-order error.
Maintenance capex keeps the engine running; growth capex buys the revenue you put in year 4. ΔNWC is often where CIM optimism hides: receivables shrink by magic, inventory never stocks a new channel. A DCF that grows revenue 12% with flat NWC is usually a cash-flow lie.
SBC: either treat it as a real cost (reduce FCFF) or capture dilution in the share count. Doing neither overstates value.
Invented Helion Software, year 3 of a forecast, illustration only. €m.
| Line | Amount |
|---|---|
| EBIT | 9.0 |
| Cash tax on EBIT (22%) | (2.0) |
| D&A | 1.4 |
| Capex (maintenance 0.8 + growth 1.5) | (2.3) |
| Increase in NWC | (0.9) |
| FCFF | 5.2 |
| Interest after tax | (0.6) |
| Net debt issuance | 0.4 |
| FCFE | 5.0 |
Note FCFF ≠ EBITDA (€10.4 in this sketch) minus capex. Tax and NWC moved the needle. Anyone discounting €10.4 as "cash" overpays.
Sponsors underwrite FCFE to equity IRRs after their debt plan; credit underwrites FCFF-like cash for covenants. M&A quality of earnings that does not bridge to cash (stock vs cash, working capital, capex) cannot support a price. Dividend capacity is FCFE, not net income.
FCFF is a model quantity; two honest analysts will classify "operating" vs "financing" leases and factoring differently. Negative FCFF is normal in high-growth compounding if ROIC on the new investment exceeds WACC—but then you must believe the ROIC.
Dazur bridges every valuation from adjusted EBITDA to FCFF in one table. That is the table buyers rebuild anyway. Owners who understand why their "profitable" year produced little free cash flow negotiate better, because they stop defending the wrong metric.