Free cash flow, FCFF & FCFE

A review of free cash flow to firm (FCFF) and free cash flow to equity (FCFE) based on adjustment of indirect cash flow statement. I use recent RadioShack's (Ticker: RSH) quarterly public (10Q) filing. FCFF is cash available to all capital suppliers; FCFE is cash available to common shareholders. Please note: 1. How working capital impacts CFO cash flows, 2. RadioShack reports FCF, but like all companies, they can define their terms, 3. FCFF adds back interest expense * (1-tax rate) because net income already includes the tax benefit (tax shield) due to the fact that interest is tax deductible.

Category:

Education

Tags:

• free
• cash
• flow
• working
• capital

[2009worstyearever]

David I liked the video but may I make a suggestion?

When you are explaining the changes in operating assets and liabilities your excel model is a bit confusing because you are adding "inventories/accounts payble" in the model yet describe these as "Accounts and notes receivable, what happened there was a decrease in A/R is a source of cash" The line in the income statement showed a decline by 11 in A/R...Ditto for inventory.

[bionicturtledotcom]

@2009worstyearever thanks, I'm not sure what you are suggesting? I agree it's inherently difficult: an increase to a current asset account (e.g., account receivable) is deducted from net income to get to cash flow. Conversely, the A/R account on the balance sheet must have decreased in order that it was ADDED back to net income as a source of cash. I'm not showing here either B/S or I/S, so not sure how to better overcome the inherent difficulty of: change in WC translating into cash flows?

[2009worstyearever]

@bionicturtledotcom David I just re-read my reply and I feel silly! Of course its Radio Shack's statement of cash flows! Sorry about that.

[bionicturtledotcom]

@2009worstyearever please, no worries. You are right, i just used RSH statement, but it is still a confusing concept that takes me several minutes to grasp!

[AtticBoy68]

David

Great upload, really helped understand the concepts.

[bionicturtledotcom]

@AtticBoy68 thank you, i really appreciate that. As i've been operating in quant for a while, My FinStatement analysis is rusty but I look forward to learning-by-doing more of this sort of thing as i try to figure out my own investments.

[mk5281]

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[Tuxster3]

What is your view of Warren Buffet's definition of free cash flow, what he calls "owner earnings"? He simply takes reported net income and adds back depreciation and amortization and then subtracts the average (arithmetic mean) capital expenditures over the last 5-7 years.

He says he defines free cash flow this way, because he looks at the company as an on going concern. Hence, averaging capital expenditures over the last 5-7 years.

I'd to hear your feedback.

[MrTomooooo]

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