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

Understand all the various types of "cash flow"

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EBITDA vs. Cash Flow vs. Free Cash Flow vs. Free Cash Flow to Equity vs. Free Cash Flow to Firm

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

Below is an infographic which we will break down in detail in this guide:

Cash Flow Comparison FCF FCFE FCFF

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

In this cash flow (CF) guide, we 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.

EBITDA Reconciliation

#2 Cash Flow (from Operations, levered)

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

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

Unlike EBITDA, cash from operations 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 From Operations Reconciliation

#3 Free Cash Flow (FCF)

Free Cash Flow can be easily derived from the statement of cash flows by taking operating cash flow and deducting capital expenditures.

FCF 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 this reason, unless managers/investors want the business to shrink, there is only $40 million of FCF available.

Free Cash Flow Reconciliation

#4 Free Cash Flow to Equity (FCFE)

Free Cash Flow to Equity can also be referred to as “Levered Free Cash Flow”.  This measure is derived from the statement of cash flows by taking operating cash flow, deducting capital expenditures, and adding net debt issued (or subtracting net debt repayment).

FCFE includes interest expense paid on debt and net debt issued or repaid, so it only represents the cash flow available to equity investors (interest to debt holders has already been paid).

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

Free Cash Flow Equity FCFE

#5 Free Cash Flow to the Firm (FCFF)

Free Cash Flow to the Firm or FCFF (also called Unlevered Free Cash Flow) requires a multi-step calculation and is used in Discounted Cash Flow analysis to arrive at the Enterprise Value (or total firm value). FCFF is a hypothetical figure, an estimate of what it would be if the firm was to have no debt.

Here is a step-by-step breakdown of how to calculate FCFF:

  1. Start with Earnings Before Interest and Tax (EBIT)
  2. 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 non-cash working capital
  6. Deduct any capital expenditures

Free Cash Flow to the Firm FCFF

This is the most common metric used for any type of financial modeling valuation.

A comparison table of each metric (completing the CF guide)

Derived FromIncome statementCash Flow StatementCash Flow StatementCash Flow StatementSeparate Analysis
Used to determineEnterprise valueEquity valueEnterprise valueEquityEnterprise value
Valuation typeComparable CompanyComparable CompanyDCFDCFDCF
Correlation to Economic ValueLow/ModerateHighHighHigherHighest
GAAP/IFRS metricNoYesNoNoNo
Includes changes in working capitalNoYesYesYesYes
Includes taxe expenseNoYesYesYesYes (re-calculated)
Includes CapExNoNoYesYesYes

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 Cash from Operations, FCF, and FCFF.

Why is it so unclear?  The fact is, the term Unlevered Free Cash Flow (or Free Cash Flow to the Firm) is a mouth full, so finance professionals often shorten it to just Cash Flow.  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 5 metrics is the best?

The answer to this question is, 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.

FCFE 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 most financial models are built on an un-levered (Enterprise Value) basis so it needs some further analysis. Compare Equity Value and Enterprise Value.

FCFF 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 the valuation of 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 free guide.

More resources from CFI

We hope this guide has been helpful in understanding the differences between EBITDA vs Cash from Operations vs FCF vs FCFF.

CFI is the global provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To help you advance as an analyst and take your finance skills to the next level, check out the additional free resources below:

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