FCFF

Free cash flow to the firm (FCFF) is a measure of a company’s cash flow that is available to all providers of capital, including debt and equity holders, after the company has satisfied its reinvestment needs. It is also known as unlevered free cash flow because it excludes the effects of financing decisions and reflects the firm’s underlying profitability and capital needs.

A common definition is FCFF = EBIT × (1 − T) + D&A − CapEx − ΔNWC, where EBIT is earnings before interest and taxes, T is the tax rate, D&A is depreciation and amortization, CapEx is net capital expenditures, and ΔNWC is the change in net working capital. A related form starts from net income: FCFF = Net income + Non-cash charges + Interest × (1 − T) − Net investment in fixed capital − ΔNWC. Both formulations converge when accounting is applied consistently.

FCFF is used in discounted cash flow analysis by projecting future FCFF and discounting at the weighted average cost of capital (WACC) to obtain enterprise value, which represents the value attributable to both debt and equity holders. This metric is particularly useful when comparing firms with different capital structures or during changes in leverage.

Relation to FCFE and leverage: FCFF is the unlevered cash flow of the firm; after financing effects are considered, the residual cash flow to equity holders is FCFE (free cash flow to equity). The two metrics are linked through the firm’s debt and financing activities.

Limitations include reliance on accounting figures and judgments about tax rate, working capital, and capital expenditures. Small input changes can materially affect FCFF, and industry differences in capital intensity and working capital norms can affect comparability.