Free Cash Flow to the Firm FCFF

[saumyasahay]

Why only Fixed Capital investment is deducted from CFO to arrive at FCFF? Why CFI is not deducted? CFI also includes cash flows and will have an impact on how much Free cash is available to the firm?

[inigohrey]

It’s answered in this thread.

@e2lcfa

Capex is an ESSENTIAL CFI activity for a firm as opposed to let’s say an acquisition( A company will continue to stay in business without an acquisition. Without capex, a company cannot continue to stay in business) Every company will have capex every year. A company needs to incur capital expenditures to conduct its business operations. If not additional capex incurred for future growth, at least maintenance capex used to maintain current operations. Only the cash flow left after taking care of working capital and capex will be available for the company to conduct other activities (dividends, share repurchase etc.).

[Analyst0718]

This is because CAPEX (purchase of fixed assets) is a core activity that recur every year, and are fairly easy to forecast for valuation purposes. There are other line items in CFI that are non-core such as cash from investment income, sales of short-term investment securities, cash payments related to mergers and acquisitions, that are infrequent or one-offs (which are hard to predict). I hope that addresses your question.

[saumyasahay]

Thanks that makes it clear.

[saumyasahay]

well explained. Thanks