How to Compute Free Cash Flow from Financial Statements?

Stock Analysis & Valuation
1

Hi All,

I am very new to investing. I don’t know how to calculate Free Cash Flow. As per books,

Free Cash Flow = EBIT(1 - tax rate) + Depreciation - CapEx - Change in Working Capital.

Now I have taken an example of Bharat Electronic for 2008-2009 so that I can compare my results with Free Cash Flow number here on ValuePickr. One can find Annual report for Bharat Electronics here athttp://www.bel-india.com/images/itm-pdfs/AR_2008-09.pdf

Let me explain my calculations

**Profit Before Tax **(page 56)

-** 10,968,359 **Rs(Thousands)

Interest(page 56)** )- 107,685**Rs(Thousands)

EBIT = PBT +Interest =10,968,359 +107,685

= 11076044Rs(Thousands)

Tax Rate = 33.99% fromhttp://en.wikipedia.org/wiki/Income_tax_in_India#Corporate_Income_tax

So,

**1) EBIT (1 - Tax Rate) **=11076044 ( 1 - 0.3399)

=7311296.644Rs(Thousands)

**
**

2) Depreciation(page 56))- 1,055,977Rs(Thousands)

3) CapEx(page 77) = Purchase of Fixed Assets(Section B. Cash From Investing Activities)

= 1,707,835Rs(Thousands)

**Working Capital:**The excess of current assets over current liabilities is referred to as the companyas working capital.

**Change in Working Capital:**The difference between the working capital for two given reporting periods is called the change in working capital.

Working Capital for Year 07- 08 = Net Current Asset (page 55) = 26,309,001Rs(Thousands)

Working Capital for Year 08- 09 = Net Current Asset (page 55) = 31,355,563Rs(Thousands)

4) Change in WC = (Working Capital for Year 08- 09) minus (Working Capital for Year 07- 08)

=31,355,563**-**26,309,001

** = 5,046,562**Rs(Thousands)

So from 1, 2, 3 and 4

FCF = **7,311,296.644+1,055,977-****1,707,835 -**5,046,562

** = 1,612,876.644**Rs(Thousands) = 161.28 (Rs. Cr.)

The above numbers are waydifferentfrom the FCF value given by ValuePickr.

FCF from Value Pickr is228.73(Rs. Cr.)

Please help

Thanks and Regards,

Yogendra

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2

I figured it out how Free Cash Flow is calculated on ValuePickr

Free Cash Flow = Cash Flow from Operation - Capital Expenditure

= Net Cash From OperatingActivities(page 77) - Capital Expenditure (page 77)

= 3993147 - 1707835

= 2285312

But still there is adifferenceof 2000 Rs (thousand) (from ValuePickr 228.73 Rs Cr)

Can Someone help me fix that difference?

Link: http://www.bel-india.com/images/itm-pdfs/AR_2008-09.pdf http://www.bel-india.com/images/itm-pdfs/AR_2008-09.pdf Link: http://www.bel-india.com/images/itm-pdfs/AR_2008-09.pdf

**Profit Before Tax **(page 56)-**10,968,359 **Rs(Thousands)

Interest(page 56))- 107,685Rs(Thousands)

=10,968,359 +107,685

= 11076044Rs(Thousands)

** http://en.wikipedia.org/wiki/Income_tax_in_India#Corporate_Income_tax Link: http://en.wikipedia.org/wiki/Income_tax_in_India#Corporate_Income_tax

So,

  1. **

=11076044

=7311296.644Rs(Thousands)

**
**

2) Depreciation(page 56))- 1,055,977Rs(Thousands)

3) CapEx(page 77) = Purchase of Fixed Assets(Section

1,707,835Rs(Thousands)

**Working Capital:**The

companyas working capital.**Change in Working Capital:**The

26,309,001Rs(Thousands)

31,355,563Rs(Thousands)

4) Change in WC = (Working

(Working

=31,355,563**-**26,309,001

= 5,046,562Rs(Thousands)

7,311,296.644+1,055,977-****1,707,835 -5,046,562= 1,612,876.644Rs(Thousands) = 161.28

waydifferentfrom is228.73(Rs.

3

Hi Yogendra,

Free Cash Flow = Cash flow from Operations - Capital expenditure.

Capital expenditure = Purchase of fixed assets - Sale of fixed assets+ Capital Work in progress (reporting year) - Capital work in progress (last financial year)

When yo have a Annual report in your hand, this is what you can do to calculate Free Cash flows for the company.

ValuePickr uses some approximation, as explained here, as detailed cash flow statement data is not available. The results are not accurate but close approximation.

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4

Thanks Donald. Finally I was able to get the figure as valuepickr.

Cheers,

Yogendra

explained here Link: …/…/…/resources/getting-started/screener-data-approximations ,

5

Hi Yogendra,

Free Cash Flow = Cash flow from Operations - Capital expenditure.

The cash flow from operations can be found from Cash flow statement (first part which deals with Cash flow from ops). Capital Expenditure can be found from Cash flow statement (second part - cash flow from investing), where it mentions about purchase of fixed assets/capital expenditure.

If you follow this simple method you dont have to worry about depreciation and other items as the fixed asset is already deducted at full value.

FCF has to be analyzed over a long period - say 10 years, because we are not counting depreciation, and we need to see how long the assets are able to generate cash flows without further capex or investment. If the company achieves higher ROCE with minimal capex additions, then its obviously an excellent pick.

Now this shows that the company is generating cash year on year consistent. Now to check how the cash is deployed you need to check for one or more of the following:-

)- Whether cash is used to pay dividends to shareholder (sharing wealth)

)- whether cash is used to buy back stock (which increases stock value)

)- whether cash is used for capex or future business plan and whether that option is going to generate steady returns (atleast above 10% - FD rate in good times)

)- whether cash is used to repay debts (this is a good move and favorable for share holders, and also reduce interest outgo)

)- whether cash is simply lying idle in banks or FDs - This is generally bad, but if the company has reasons to hoard cash (say for acquisition, reserve to tackle slowdown, etc) you can judge whether its justified

)- whether company is going to expand in to unrelated areas or buy unfit firms or companies or divert cash to subsidiaries (these are dangerous).

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