The Ultimate Cash Flow Guide (EBITDA, CF, FCF, FCFF)

Understand all the various types of "cash flow"

EBITDA vs. Cash Flow vs. Free Cash Flow vs. Unlevered Free Cash Flow

Finance professionals will frequently refer to EBITDA, Cash Flow (CF), Free Cash Flow (FCF), and Unlevered Free Cash Flow (FCFF – Free Cash Flow to the Firm), but what exactly do they mean? There are major differences between EBITDA vs Cash Flow vs Free Cash Flow vs Unlevered Free Cash Flow and this Cash Flow Guide was designed to teach you exactly what you need to know!

Below is a cash flow infographic which we will break down in detail in this guide:


Cash Flow Infographic



CFI has published several articles on the most heavily referenced finance metric, ranging from what is EBTIDA to the reasons Why Warren Buffett doesn’t like EBITDA.

In this cash flow (CF) guide will provide concrete examples of how EBITDA can be massively different from true cash flow metrics.  It is often claimed to be a proxy for cash flow, and that may be true for a mature business with little to no capital expenditures.

EBITDA can be easily calculated off the income statement (unless depreciation and amortization are not shown as a line item, in which case it can be found on the cash flow statement).  As our infographic shows, simply start at Net Income then add back Taxes, Interest, Depreciation & Amortization and you’ve arrived at EBITDA.

As you will see when we build out the next few CF items, EBITDA is only a good proxy for CF in two of the four years, and in most years, it’s vastly different.

cash flow guide - EBITDA calculation


#2 Cash Flow (Cash Flow from Operations, levered)

Operating Cash Flow (or sometimes called “cash from operations”) is a measure of cash flow generated by a business from its normal operating activities.

Like EBITDA, depreciation and amortization are added back to operating cash flow.  However, all other non-cash items like stock-based compensation, unrealized gains/losses, or write-downs are also added back.

Unlike EBITDA, operating cash flow includes changes in net working capital items like accounts receivable, accounts payable and inventory.

Operating cash flow does not include capital expenditures (the investment required to maintain capital assets).


cash flow guide - cash from operations example


Valuation Techniques

Learn the most important valuation techniques in CFI's Business Valuation course! Step by step instruction on how the professionals on Wall Street value a company.  


Learn valuation the easy way with templates and step by step instruction!


#3 Free Cash Flow (levered)

Free Cash Flow can also be referred to as “Levered Free Cash Flow” or “Cash Flow to Equity”.  This measure of cash flow can be easily derived from the cash flow statement by taking operating cash flow and deducting capital expenditures.

Free Cash Flow gets its name from the fact that it’s the amount of cash flow “free” (available) for discretionary spending by management/shareholders.  For example, even though a company has operating cash flow of $50 million, it still has to invest $10million every year in maintaining its capital assets.  For the reason, unless managers/investors want the business to shrink, there is only $40 million of Free Cash Flow available.

Free Cash Flow includes interest expense on debt, so it only represents that cash flow available to equity investors (interest to debt holders has already been paid.

Free Cash Flow (Levered Free Cash Flow) is used in financial modeling to determine the equity value of a firm.

cash flow guide - free cash flow levered example


#4 Unlevered Free Cash Flow (Free Cash Flow to the Firm)

Unlevered Free Cash Flow (also called Free Cash Flow to the Firm – FCFF) requires a multi-step calculation and is used in Discounted Cash Flow analysis to arrive at the Enterprise Value (or total firm value).

Here is a step-by-step breakdown of how to calculate unlevered free cash flow:

  1. Start with Earnings Before Interest and Tax (EBIT)
  2. Next calculate the hypothetical tax bill the company would have if they didn’t have the benefit of a tax shield
  3. Deduct the hypothetical tax bill from EBIT to arrive at an unlevered Net Income number
  4. Add back depreciation and amortization
  5. Deduct any increase in net working capital
  6. Deduct any capital expenditures


cash flow guide - unlevered free cash flow


The is most common cash flow metric used for any type of financial modeling valuation.


A comparison of each cash flow metric (completing the CF guide)


Derived FromIncome statementCash Flow StatementCash Flow StatementSeparate Analysis
Used to determineEVEquityEquityEV
Valuation typeComparable CompanyComparable CompanyDCFDCF
Correlation to Economic ValueLow/ModerateHighHigherHighest
GAAP/IFRS metricNoYesNoNo
Includes changes in working capitalNoYesYesYes
Includes taxesNoYesYesYes (re-calculated)
Includes CapExNoNoYesYes


If someone says “Free Cash Flow” what do they mean?

The answer is, it depends.  They likely don’t mean EBITDA, but they could easily mean Operating Cash Flow, Free Cash Flow, and Unlevered Free Cash Flow.

Why is it so unclear?  The fact is, the term Unlevered Free Cash Flow is a mouth full, so finance professionals often shorten it to just CF.  There’s really no way to know for sure unless you ask them to specify exactly which types of CF they are referring to.


Which of the 4 metrics is the best?

The answer to this question is also, it depends.  EBITDA is good because it’s easy to calculate and heavily quoted so most people in finance know what you mean when you say EBITDA.  The downside is EBITDA can often be very far from cash flow.

Operating Cash Flow is great because it’s easy to grab from the cash flow statement and represents a true picture of cash flow during the period.  The downside is that it contains “noise” from short term movements in working capital that can distort it.

Levered Free Cash Flow is good because it is easy to calculate and includes a true picture of cash flow after accounting for capital investments to sustain the business.  The downside is that it most financial models are built on an un-levered (Enterprise Value) basis so it needs some further analysis. Compare Equity Value and Enterprise Value.

Levered Free Cash Flow is good because it has the highest correlation of the firm’s economic value (on its own, without the effect of leverage).  The downside is that it requires analysis and assumptions to be made about what the firm’s unlevered tax bill would be.  This metric forms the basis for valuation most DCF models.


What else do I need to know?

CF is at the heart of valuation.  Whether it’s comparable company analysis, precedent transactions, or DCF analysis.  Each of these valuation methods can use different cash flow metrics, so it’s important to have an intimate understanding of each.

In order to continue developing your understanding, we recommend our financial analysis course, our business valuation course, and our variety of financial modeling courses in addition to this cash flow guide.


More resources from CFI

We hope this guide has been helpful in understanding the differences between EBITDA vs Operating Cash Flow vs Free Cash Flow vs Unlevered Free Cash Flow.

To continue building your skillset we highly recommend these additional guides and free resources: