FCF before dividends

CFA Level I Fixed Income
#1

I’m working on a little project and I’m trying to calculate the free cash flow before dividends (FCF before dividends) for a company. I’m confused as to why cash is excluded from the calculation? Couldn’t cash be used to pay down debt?

FCF before dividends:
This measures excess cash flow generated by the company (excluding non-recurring items) before payments to shareholders or that could be used to pay down debt or pay dividends. It can be calculated as net income (excluding non-recurring items) plus depreciation and amortization minus increase (plus decrease) in non-cash working capital minus capital expenditures

#2

It is excluded because cash is typically not considered working capital. Think about a company like Google or Berkshire Hathaway that have decided to stockpile their cash for acquisition or other opportunities. Considering this excess cash in the working capital calculation would greatly exaggerate the amount of working capital required to operate the business. To adjust for this you use cash-free working capital which is also usually debt-free.

1 Like
#3

Makes sense. Thanks!