Different formulas to compute FCFF

There are many ways to compute FCFF. Say, one can start from EBIT or from NI and many other ways. But, how will we come to know which method to use?
Some times for some companies different formulas give different FCFF figure.

Most likely they are only going to provide enough data for one approach.

But , still. My boss is asking this question and i have to answer it.If you know plz tell me. When to start from NOPAT and when to start from EBITDA.?

Only if there’s some inconsistency in the data.


You’re right, there are many formulas. That’s because FCFF is a concept more than anything so different people can have differeht takes.

The one thing you know for sure though is that the change in cash as the bottom of the CF statement has to be correct assumimg no fraud. So the only question is what effects to include in FCFF.

In a real world situation this is what i do. First, i derive EBITDA from the PnL. Both reported and adjusted.
Then i back solve EBITDA from the cash flow statement.
Then i reconcile the two, so i know what cash movements are / arent in the PnL EBITDA.
From there, i aggregate the various buckets of the CF statement, split between operating and non operating:

Operating = chg NWC, capex, cash taxes other operating items.
Non operating = chg debt, chg in equity, debt service, other non operating items.

There are items such as m+a and leases where some judgment can be applied as can sometimes be argued both ways.

This gives you a simple waterfall; revenue->cash EBITDA → CF after operating items (ie FCFF) → net chg in cash

Ideally you do this for the last 3-5 years to capture different business cycles.

From there, youll be able to adjust for exceptionals, and you’ll have a feel for ‘normative’ vs ‘actual’ FCFF.

You will then be able to build some forecast and sense check that your FCFF estimate is correct.

The key difference is taxes.
FCF from NOPAT: assume debt free/cash free structure, tax shield only through WACC

FCF from EBITDA: assmues a specific debt structure with tax shield based on the actual balance sheet.

Normally, the difference between the two is simply equal to the tax shield.

You use NOPAT when you run a DCF.

This is one issue wirh many desktop DCFs thougj: it typically assumes the debt/equity ratio is constant, which is a contradiction since the cash generation to infinity has to have a use.
And so most DCF overstate the value of the tax shield. This is one reason why professionnals dont use DCF as an actual valuation method. Rather, its used as a negotiation tool.