Archive / Research Analyst / Company Analysis - Financial Analysis

nism-series-xv-fcff-free-cash-flow-to-firm-formula-calculation[ RESEARCH ANALYST ]

A manufacturing company reports EBIT of ₹1,200 Crore, corporate tax rate of 25%, Depreciation & Amortization of ₹250 Crore, Capital Expenditures (CapEx) of ₹400 Crore, and an increase in Non-Cash Working Capital of ₹80 Crore. What is the firm's Free Cash Flow to Firm (FCFF)?

[ A ]₹670 Crore [ NOPAT + D&A - CapEx - ΔWC = ₹900 + ₹250 - ₹400 - ₹80 ][ CORRECT ]

[ B ]₹970 Crore (Forgetting to deduct CapEx)

[ C ]₹750 Crore (Omitting Working Capital investment)

[ D ]₹590 Crore

Takeaway

Option A is correct: ₹670 Crore [ NOPAT + D&A - CapEx - ΔWC = ₹900 + ₹250 - ₹400 - ₹80 ]

Derivation

NOPAT = EBIT × (1 − t) = ₹1,200 Cr × (1 − 0.25) = ₹900 Crore, representing the after-tax operating profit before financing effects. Add back Depreciation & Amortization since it's a non-cash charge that reduced accounting profit without actually consuming cash: ₹900 + ₹250 = ₹1,150 Crore. Then deduct the two real cash reinvestments the business must make to sustain and grow operations: CapEx of ₹400 Crore and the ₹80 Crore absorbed by growing Non-Cash Working Capital. FCFF = ₹1,150 − ₹400 − ₹80 = ₹670 Crore. This figure represents cash available to all capital providers, debt and equity combined, before any financing decisions, which is exactly why it gets discounted at WACC rather than at the cost of equity alone when computing Enterprise Value.

Why the others fail

B — ₹970 Crore (Forgetting to deduct CapEx)

Adds back D&A and computes NOPAT correctly but forgets to subtract the ₹400 Crore CapEx, which overstates the free cash actually available to the firm.

C — ₹750 Crore (Omitting Working Capital investment)

Correctly deducts CapEx but omits the ₹80 Crore absorbed by the increase in Non-Cash Working Capital, overstating true free cash flow to the firm.

D — ₹590 Crore

Does not correspond to the correct sequence of adding D&A and subtracting both CapEx and the working capital increase from NOPAT of ₹900 Crore.