Free Cash Flow FCF (FCFF unlevered vs FCFE levered)
The cash a business throws off after funding the investment needed to sustain and grow it, the cash genuinely available to pay investors.
The fork, why two teams get different numbers
"FCF" names at least three different numbers. The operator's simple FCF is
operating cash flow minus capital expenditure. The valuation analyst's
unlevered FCF (free cash flow to the firm) starts from EBIT, taxes it, adds
back non-cash charges, and subtracts capex and the change in working capital, deliberately before interest, so the figure is capital-structure-neutral for a
DCF. The equity holder's levered FCF (free cash flow to equity) then subtracts
interest and net debt repayment, leaving what is truly available to
shareholders. A second fork sits inside all three: capex at total (growth plus
maintenance) vs maintenance-only, the latter flattering FCF by treating growth
investment as optional. Management quotes whichever version reads best.
The trap
FCF is inflated by capitalizing what is really operating cost, internal-use software, cloud build-out, content, which moves spend out of operating cash flow and into capex, or off the operating section entirely.
- The full trap, worked on a real export
- Every formula variant, spelled out
- The reconciliation anchor, what to tie it to and when to refuse
Reference: FASB ASC 230 (Statement of Cash Flows) · FASB ASC 842 (Leases) · CFA Institute (FCFF / FCFE framework)