Finance

Free Cash Flow Calculator

Compute FCFF and FCFE from net income, EBIT, EBITDA or operating cash flow, then value the business with a Gordon growth or exit multiple DCF. Includes FCF margin, conversion, reinvestment rate and FCF yield.

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What is Free Cash Flow Calculator?

Free cash flow is the cash a business actually generates after funding the assets it needs to operate. Reported profit answers a different question: it includes non-cash accounting charges and it is measured before the spending that keeps the business running. For a company that has to keep buying equipment or carrying more inventory to hold its revenue, the gap between the two can be very wide.

This calculator builds free cash flow from the figures you already have. It accepts net income, EBIT, EBITDA or operating cash flow and runs every route you supply, then shows whether they agree. That agreement is the point: the four routes are algebraically identical, so when they produce different answers at least one line of your inputs is inconsistent, and the spread tells you how far apart they are.

On top of the build-up it values the business directly, discounting a forecast of free cash flow back to today with a Gordon growth model or an exit multiple. It also computes the ratios that describe cash quality: FCF margin, cash conversion against EBITDA and net income, the share of NOPAT absorbed by reinvestment, and FCF yield against the current market price. A high margin with weak conversion, or strong conversion eaten by reinvestment, tells a very different story from the headline profit figure.

When to Use This Calculator

  • You are comparing two companies in the same industry and need a measure that is not distorted by depreciation policy or leverage.
  • You are building a DCF and need a defensible starting cash flow figure that every route agrees on.
  • A company reports strong profit but its operating cash flow keeps falling, and you want to know whether the profit is real.
  • You are negotiating the price of a private business and the seller is quoting a multiple rather than a cash flow.
  • You are checking whether a quoted valuation already assumes the growth rate you are planning to underwrite.
  • You want to see how sensitive a headline valuation is to the discount rate before you rely on it in an investment decision.

Steps:

  1. Gather the income statement and cash flow lines: revenue, net income, EBIT, EBITDA, operating cash flow, D&A, capex, the change in working capital and the tax rate.
  2. Decide which route fits your data. Net income, EBIT, EBITDA and operating cash flow all reach the same unlevered figure, but each needs different inputs to be complete.
  3. Read the route table. Every route you could fill in appears, and the one used for the headline result is marked.
  4. Check that the routes agree. If the spread is wide, the most common causes are EBITDA that does not equal EBIT plus D&A, net income that is not EBIT less after-tax interest, or an operating cash flow figure that already excludes working capital.
  5. Switch to the DCF mode and enter a forward free cash flow figure, a growth rate, a discount rate and the forecast length. Keep the growth rate below the discount rate or the Gordon model is undefined.
  6. Choose the mid-year or year-end convention. Mid-year matches a business that earns cash evenly through the year; year-end assumes it all arrives on the last day.
  7. Value the business, then bridge enterprise value to equity value by subtracting net debt and divide by the share count for a per-share figure.
  8. Read the terminal value share. Above roughly 80% the valuation is dominated by assumptions beyond the forecast window, so the sensitivity grid matters more than the point estimate.

Formula

FCFF = net income + D&A + interest x (1 - tax rate) - capital expenditure - change in working capital. The same figure can be rebuilt from EBIT as EBIT x (1 - tax rate) + D&A - capex - change in working capital, from EBITDA as EBITDA x (1 - tax rate) + tax rate x D&A - capex - change in working capital, or from operating cash flow as operating cash flow + interest x (1 - tax rate) - capex. FCFE = FCFF - interest x (1 - tax rate) + net borrowing. In the DCF, terminal value = final year cash flow x (1 + g) / (discount rate - g), and enterprise value is the sum of the discounted forecast years plus the discounted terminal value.

Use Cases

  • Comparing businesses on the cash they actually produce rather than the profit they report, which is the whole point of the FCF margin.
  • Valuing a company with a DCF when you want to see the value per share implied by a growth rate and discount rate you choose.
  • Testing whether reported profit is real, by checking whether operating cash flow is close to net income or profit is being absorbed by working capital.
  • Judging how much of a company's operating profit has to be reinvested to hold its growth, before assuming any of it is distributable.
  • Pricing a target or a private business where a market multiple is unavailable and a cash flow build-up is the defensible alternative.
  • Sanity-checking a valuation that came from a multiple by seeing what discount rate and growth rate it implies.

Key Benefits

  • Four independent routes to the same number, so an error in the inputs shows up as a disagreement instead of a confident wrong answer.
  • A direct DCF with both the Gordon growth and exit multiple methods, plus the terminal value share so you can see how much of the answer rests on assumptions outside the forecast window.
  • Cash quality metrics that expose the weaknesses a profit figure hides, including weak conversion and reinvestment that consumes the cash the business generates.
  • A sensitivity grid over the discount rate and growth rate, because those two inputs move the valuation more than anything else in the model.
  • A mid-year or year-end switch, so the discounting convention matches how the business actually earns its cash.
  • Nothing to sign up for and no data leaves your browser, since every calculation runs locally on the page.

Pro Tips

  • Enter every figure from the same reporting period, since a trailing net income against a forward cash flow line will not reconcile.
  • Start from operating cash flow if you have it, because it is the hardest line to misstate, then let the other routes confirm the result.
  • Keep the gap between the discount rate and the growth rate comfortably wide, ideally four points or more, or the terminal value dominates the answer.
  • Run the sensitivity grid before you trust a single number, and treat the range as the real answer.
  • For a business with heavy capital spending, check the reinvestment rate first. A high rate means much of the operating profit has to be spent just to stay in place.
  • Use net cash as a negative net debt figure, and remember that enterprise value includes it, so the equity bridge adds it back.

Common Mistakes to Avoid

  • Subtracting the change in working capital twice when starting from operating cash flow, because that figure already reflects it.
  • Using a growth rate at or above the discount rate, which makes the Gordon terminal value undefined and silently produces a value of zero.
  • Treating a high terminal value share as harmless. Above roughly 80% the valuation is mostly a statement about a period you never modelled.
  • Valuing a loss-making company on its current negative free cash flow instead of a normalized forward figure, which yields a meaningless number.
  • Comparing FCF margin across companies with very different capital intensity without looking at the reinvestment rate alongside it.
  • Mixing a levered starting point with unlevered discounting, which double counts the benefit of debt in the discount rate.

Key Terms Explained

FCFF:
Free cash flow to the firm, the cash available to all capital providers before financing costs, and the correct input for an enterprise value.
FCFE:
Free cash flow to equity, what remains for shareholders after debt service, and the right input for an equity value directly.
NOPAT:
Net operating profit after tax, operating profit multiplied by one minus the tax rate, before any financing decision.
Change in working capital:
The cash absorbed by growth in receivables, inventory and payables, a deduction because it is a use of cash even though it is not an expense.
Reinvestment rate:
Net reinvestment divided by NOPAT, showing how much operating profit must be spent to sustain the current growth rate.
Terminal value:
The value of all cash flow after the explicit forecast period, expressed as a growing perpetuity or an exit multiple.
Mid-year convention:
Discounting each cash flow from the middle of the year it arrives in, which matches a business that earns cash evenly through the year.
Enterprise value:
The value of the operating business to all capital providers, before net debt is deducted to reach equity value.

Related Concepts

  • Net present value: The same discounting arithmetic applied to a project's incremental cash flows, used to decide whether an investment creates value.
  • Internal rate of return: The discount rate at which net present value is zero, expressing the same cash flows as a single percentage.
  • Weighted average cost of capital: The blended cost of equity and debt that the discount rate represents, and the rate the growth rate must stay below.
  • EBITDA: Operating profit before depreciation, amortization, interest and tax, one of the alternative starting points for the FCFF build-up.
  • Reinvestment rate: The share of NOPAT absorbed by net capital spending and working capital, which determines sustainable growth.
  • Return on invested capital: NOPAT divided by invested capital, the return measure that pairs naturally with the reinvestment rate here.

Example

Consider a SaaS company with revenue of 12,000,000, net income of 1,260,000, EBIT of 1,800,000, EBITDA of 2,400,000, D&A of 600,000, capex of 350,000, an increase in working capital of 180,000 and a 25% tax rate. From net income: 1,260,000 + 600,000 + interest x 0.75 - 350,000 - 180,000. With interest of 120,000 the after-tax cost is 90,000, giving FCFF of 1,420,000. From EBIT: 1,800,000 x 0.75 + 600,000 - 350,000 - 180,000 = 1,420,000, the same answer. From operating cash flow: 1,680,000 + 90,000 - 350,000 = 1,420,000. All three agree, so the inputs are consistent. FCFE is 1,420,000 - 90,000 = 1,330,000. Valuing it at a 7% growth rate and a 12% discount rate over five years on the mid-year convention gives an enterprise value of about 30,055,735, and adding 1,500,000 of net cash produces an equity value of about 31,555,735, or roughly 15.78 per share across 2,000,000 shares. FCF margin is 11.83%, cash equals 112.70% of net income, and the FCF yield on a 30,000,000 market capitalization is 4.73%.

Interpreting Your Results

Start with the route table, not the headline number. If the four routes disagree, you do not yet have a free cash flow figure, you have four candidate answers. The spread tells you how much is at stake, and the most common culprits are an EBITDA that does not equal EBIT plus D&A, a net income that is not EBIT less after-tax interest, or an operating cash flow line that has already had working capital removed.

Then read the margin against the reinvestment rate. A high FCF margin is only as good as the cash that survives reinvestment. An asset-heavy business can show a respectable margin while absorbing more than half of NOPAT into capital spending and working capital, which is growth bought rather than cash returned. Conversely a thin margin with near-zero reinvestment can be a mature, genuinely cash-generative business.

Check conversion for signs of earnings quality. Cash well below net income points to profit being recognised ahead of collection, usually through receivables or inventory build. Cash above net income is the opposite, and often reflects customer prepayments or a shrinking working capital balance. Neither is automatically good or bad, but a persistent gap in one direction changes how much you should trust the reported profit.

Treat the terminal value share as a warning, not a detail. In a typical five-year DCF the terminal value is a large share of the answer, and it depends entirely on two numbers you chose. When that share is above roughly 80%, the valuation is mostly a statement about a period you never modelled. Use the sensitivity grid, widen the spread between discount rate and growth rate, and report a range rather than a single figure.

Finally, compare FCF yield with what you expect to happen next. A high yield can mean the market has mispriced the cash flow or that it expects the cash flow to fall. Feed the growth rate you are actually willing to underwrite into the DCF and compare the resulting per-share value with the market price, rather than reading the yield in isolation.

Frequently Asked Questions

What is the difference between FCFF and FCFE?
FCFF, free cash flow to the firm, is the cash available to every capital provider before any financing cost, so it is the right input when you discount at the weighted average cost of capital to get enterprise value. FCFE, free cash flow to equity, is what remains for shareholders after interest and principal, so it is the right input for an equity value. The bridge between them is simple: FCFE = FCFF - interest x (1 - tax rate) + net borrowing. If interest is tax deductible, only the after-tax portion is deducted, because the tax saved is cash the business keeps.
Why do the four free cash flow routes sometimes give different answers?
The four routes are algebraically identical, so any difference comes from your inputs, not from the method. It happens when the figures are not internally consistent: EBITDA that does not equal EBIT plus depreciation and amortization, net income that is not EBIT less after-tax interest, or an operating cash flow figure that has already had working capital or D&A stripped out. The calculator marks the route it used and reports the spread, so you can see exactly how far apart the answers are before you rely on any of them.
What is a good free cash flow margin?
It depends entirely on the industry. Mature software and asset-light subscription businesses often run 20% to 30% or more, established manufacturers sit near 5% to 15%, and retailers frequently land under 5% because inventory and store capital absorb the cash. The number is only meaningful against comparable companies, and it should be read together with the reinvestment rate, because a high margin that disappears into capital spending is not the same as a high margin that reaches shareholders.
What does a free cash flow yield above 10% mean?
It means the business is generating cash equal to more than a tenth of its current market value each year, which looks compelling in isolation. The catch is that the market may already expect that cash flow to shrink, so a high yield can be a warning rather than a bargain. The useful test is to feed the growth rate you are genuinely willing to underwrite into the DCF and see whether the resulting value per share exceeds the market price.
Why must the growth rate be lower than the discount rate?
The Gordon growth terminal value divides the final cash flow by the difference between the discount rate and the growth rate. When the two are equal the denominator is zero and the value is infinite; when growth exceeds the discount rate the result is negative, which is meaningless. The requirement is also intuitive: cash flows growing faster than the economy can be sustained forever cannot be worth a finite amount today. This calculator flags the problem and refuses to produce a terminal value rather than returning a misleading figure.
How do I value a company that is currently losing money?
Do not discount the negative cash flow you have today, because a loss-making period is not a permanent state. Instead estimate a normalized forward free cash flow, usually a year or two out once the business reaches a sustainable position, and use that as the starting figure. In this calculator that means entering a forward free cash flow, a growth rate and a discount rate in DCF mode, and looking at the gap between that entry and today's reported result.
What is the mid-year discounting convention and when should I use it?
The mid-year convention assumes cash arrives evenly through each year rather than all at the end, so each flow is discounted from the middle of the year it belongs to and the terminal value is pulled forward half a period. It is the more accurate treatment for a business that bills and collects throughout the year, and it raises the present value of a positive cash flow stream. The year-end convention assumes everything lands on the final day, which suits businesses with lumpy seasonal receipts.
What is a healthy reinvestment rate?
It depends on the growth you are underwriting. A reinvestment rate of 50% of NOPAT is normal for a business growing quickly and deliberately spending to support it, and it is not a warning sign on its own. Two extremes are worth noting: a persistently negative rate means depreciation exceeds your capital spending and working capital needs, so the business is releasing cash and may be underinvesting; a rate near or above 100% means essentially all operating profit is being consumed, and any growth is being funded rather than self-financed.
Should I subtract depreciation from free cash flow?
No. Depreciation is a non-cash accounting charge that reduced reported profit but did not move any cash, so it is added back in the build-up, and the cash cost of replacing the asset is captured separately through capital expenditure. Adding depreciation back without also recording capex is the classic way to overstate free cash flow, because the asset still has to be replaced eventually. That is exactly why the reinvestment rate matters: it compares capital spending and working capital against that add-back.
How reliable is a DCF for a stable, profitable company?
The build-up is reliable when the statement inputs agree across routes, which is the first thing to verify. The valuation is only as good as the terminal assumptions, and for most companies the terminal value is the majority of the answer. Treat the point estimate as one output of a range: check the sensitivity grid, confirm the growth rate is one you would defend, and note that a five-point spread between discount rate and growth rate is a reasonable minimum for a result you intend to act on.
What is the difference between free cash flow and operating cash flow?
Operating cash flow is the cash generated by operations before capital spending. Free cash flow is what remains after capital expenditure, and it is the figure available for debt repayment, buybacks, dividends or further investment. The gap between them, capex, is exactly the part of operating cash flow the business must retain just to maintain its asset base, which is why a business can have healthy operating cash flow and thin free cash flow at the same time.

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