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Step 2: additional slides on
understanding Free Operating
Cash Flow to Capital
STEP 2 FREE OPERATING CASH FLOW TO CAPITAL
Free Operating Cash Flow to Capital
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The definition of free operating free cash flow to capital is……
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STEP 2 FREE OPERATING CASH FLOW TO CAPITAL
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Free Operating Cash flow to Capital
(1) Net sales
Minus
Cost of goods sold
Equals
(2) Gross Profit
Minus
Minus
Expenses
Depreciation
Equals
(3) Earnings before Interest and Taxes (EBIT)
Minus
Taxes on EBIT (tax rate x EBIT)
Equals
(4) Net Operating Profits less Adjusted Taxes (NOPLAT)
Plus
Depreciation
Equals
(5) Gross Cash Flow to Capital
Minus/plus
Minus/plus
Minus/plus
5a. Increase/decrease in net working capital
5b. Increase/decrease expenditures in net property, plant, and equipment
5c. Increase/decrease in other operating assets
Equals
(6) Free Operating Cash Flow to Capital
STEP 2 FREE OPERATING CASH FLOW TO CAPITAL
Some definitions…
(5) Gross cash flow = total end of year cash flow generated by
the company’s operations before all investments.
(6) Free operating cash flow to capital = total end of year cash
flow generated by the company’s operations after all
investments. So, this is the cash flow entirely available for
investor payout.
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STEP 2 FREE OPERATING CASH FLOW TO CAPITAL
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Quiz 3: Net profit? We rather use FOCF, because…
Q1: what is the free operating cash flow to capital at December 31 if the company invested 800 in cash?
Q2: what is the free operating cash flow to capital at December 31 if the company invested 100 in cash?
Profit & loss statement at 31/12
Net sales
1,000
Cost of goods sold 100 -/Gross profit
900
Salary expenses
100
Depreciation
100 -/EBIT
700
Interest
100 -/600
Tax @ 50%
300 -/Net profit
300
(1)
(2)
(3)
(4)
(5)
(6)
Free operating cash flow to capital at 31/12
Net sales
Costs of goods sold
Gross profit
Salary expenses
Depreciation
Earnings before interest and taxes
Taxes of 50% on EBIT
Net operating profit less adjusted tax
Depreciation
Gross cash flow
Investments
Free operating cash flow to capital
1,000