![]() ![]() Most Non-Cash Adjustments on the Cash Flow Statement – Many of the other items here, such as Gains and Losses, are non-recurring and have nothing to do with the company’s core-business operations.Preferred Dividends – Often shown toward the bottom of the Income Statement, this one relates only to the Preferred Stock investors and is not available to all the other investors in the company.Other Income / (Expense) – This is related to non-core-business activities, such as side businesses in other areas, so we ignore it.Therefore, we ignore it in the Unlevered FCF calculation. Common shareholders do not receive these payments at all. Net Interest Expense – This relates only to the Debt Investors, i.e., the lenders, and is not available to all the investors in the company.Why do we ignore the Net Interest Expense, Other Income / (Expense), Preferred Dividends, most non-cash adjustments on the Cash Flow Statement, most of Cash Flow from Investing, and all of Cash Flow from Financing? ![]() Unlevered Free Cash Flow = Operating Income * (1 – Tax Rate) + Depreciation & Amortization +/- Deferred Income Taxes +/- Change in Working Capital – Capital Expenditures Subtract Capital Expenditures (CapEx), which represents re-investment into the company’s business in the form of spending on long-term assets such as land, factories, buildings, and equipment.Add or subtract the Change in Working Capital, which indicates how the company is managing payments from customers, inventory, bills from suppliers, and other receivables and payables.If the company has Deferred Income Taxes or other recurring items that affect its cash flow, also factor those in.Add back the company’s Depreciation & Amortization, which is a non-cash expense that reduces its taxes but which does not “cost” it anything in cash in the current period.Multiply by (1 – Tax Rate) to get the company’s Net Operating Profit After Taxes, or NOPAT.Start with Operating Income (EBIT) on the company’s Income Statement.You can see how everything ties together in the screenshot below for Steel Dynamics:Įach company is a bit different, but a “formula” for Unlevered Free Cash Flow would look like this: Then, we discount the UFCFs to their Present Value at the appropriate discount rate, estimate the company’s value from the end of the projection period into infinity (the “Terminal Value”), take the Present Value of the Terminal Value, and add these two components together to determine the company’s Implied Enterprise Value. We use Unlevered Free Cash Flow in a Discounted Cash Flow (DCF) Analysis to value a company, and we start by projecting the company’s Unlevered Free Cash Flow over 5, 10, or even 20 years. You can see how we calculate it in real life for Steel Dynamics (STLD) in a screenshot of our DCF model for the company below: ![]()
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