How to calculate the free cash flow

Knowing how to calculate free cash flow is very practical, especially when analyzing an investment using the cash flow discount. The free cash flow can be calculated in several ways, this time we will explain the "Entity approach" in a very simple way.

You will need to:
  • Calculator
  • Paper
  • Ballpoint pen or pencil
Steps to follow:

one

Obtain the Gross Profit by subtracting "Sales" - "Cost of sales" .Bº Gross = Sales - Cost of sales

two

To the "B ° Gross" subtract the "sales expenses" and "amortizable" and add "other income". This way you will obtain the Profit before taxes and interests ("EBIT" in English) EBIT = Bº Gross - Expenses of sales - Depreciable expenses + other income

3

To the "EBIT" subtract the "taxes" and you will get the Operational benefits after taxes ("NOPAT" or net operating profit after tax) .NOPAT = EBIT - Taxes

4

To the NOPAT add the "Amortization expenses". The result will be " Gross cash flow". Gross cash flow = NOPAT + Depreciation expense

5

Once obtained to the " Gross cash flow " subtract the "Investment in operating current assets" and the "Investment in operating fixed assets" ("MC" or maintenance capex). This way you will get the " Free cash flow " Free cash flow = Gross cash flow - MC