Question

What id FCF, how is it calculated, and why is it important to existing and prospective financial stakeholders?  What is NOPAT and how is it calculated? What are EBIT and EBITDA and how are they calculated?

Answer 1

Free cash flow is defined as operating cash flow minus capital expenditures. It is considered as an essential outflow of funds to maintain a company's competitiveness and efficiency.

Free Cash Flow (FCF) = Operating cash Flow - Capital Expenditure

It is important to existing and prospective financial stakeholders because the value of stock is calculated by discounting the all expected Free Cash Flows to its present value.

Net Operating Profit after Taxes (NOPAT) is earnings before interest and taxes of a company it excludes cost taxes benefits of debt financing.

Net Operating Profit after Taxes (NOPAT) = Operating Income * (1- Tax Rate)

Where

Operating income is Earnings before Interest and Taxes (EBIT)

Earnings before Interest and Taxes (EBIT) are operating profit of company before the payment of interest expenses and Taxes.

Company’s operating profit or Earnings before Interest and Taxes (EBIT) = Revenue - Expenses

EBITDA is Earnings before Interest, taxes, depreciation and amortization

Depreciation and amortization are added back to Earnings before Interest and Taxes (EBIT) to calculate EBITDA

EBITDA = EBIT + depreciation + amortization