Free Cash Flow Calculation Formula | Correct Algorithm for Free Cash Flow

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1. Free cash flow formula

Free cash flow calculation formula: Free cash flow=(net operating profit after tax+depreciation and amortization) - (capital expenditures+increase in working capital). The basic formula of the free cash flow model is as follows: Free cash flow (FCFF) of a company=(net profit after tax+interest expenses x (1-tax rate t)+non cash expenditures) - Working capital additions - Capital travel expenses=(EBIT) x (1-tax rate t)+Depreciation and amortization - Net working capital (NWC) - Capital expenditures (investments) (CAPX)+Other cash to break down sources. Free cash flow of the company=EBITDA (earnings before interest, tax and depreciation) x (1-tax rate t)+tax rate t x depreciation and amortization - capital expenditures (CAPEX) - net working capital (NWC)+cash sources=(1-tax rate t) x EBITD - changes in net assets (NA). Among them, EBIT=profit before interest and taxes, which is the net profit before deducting interest expenses and taxes payable. The economic significance of free cash flow is that the companys free cash flow is the maximum amount of cash available for distribution to shareholders and creditors. The role of free cash flow: For shareholders and investors, the amount of free cash flow is equal to the maximum dividend that shareholders or investors may actually receive, which is an objective measure of investment returns, reflects the true value of the enterprise, and eliminates possible moisture. The free cash flow per share or the free cash flow multiplier calculated based on it is a reliable basis for evaluating the value of enterprises, which has a positive effect on curbing the illegal behavior of manipulating stock prices by manipulating profits in Chinas capital marke

2. The correct algorithm for free cash flow

The correct algorithm for free cash flow needs to be distinguished based on the nature of the enterprises capital expenditures, with the core being the deduction of necessary investments required to maintain existing profitability (preservation capital expenditures), rather than all capital expenditures.

1. Basic Formula (Simplified Version) Free Cash Flow=Net Cash Flow from Operating Activities - Capital Expenditure Net Cash Flow from Operating Activities: Reflects the actual cash received by the enterprise through its main business, which can be directly obtained in the cash flow statement. Capital expenditure: usually refers to the cash expenditure of long-term assets (such as fixed assets, intangible assets, etc.) invested by enterprises to maintain or expand production capacity. The common simplification method for domestic data websites is to calculate using "net operating cash flow - cash paid for the purchase and construction of fixed assets, intangible assets, and other long-term assets". Problem: This method may underestimate the true free cash flow, as the "cash paid for the purchase and construction of long-term assets" includes some expansionary investments (such as building new production lines, mergers and acquisitions, etc.), which are not necessary costs to maintain existing profitability. (Taking Fuling pickled vegetables as a

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