{"id":31071,"date":"2025-02-26T11:46:14","date_gmt":"2025-02-26T16:46:14","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=31071"},"modified":"2025-04-02T18:52:55","modified_gmt":"2025-04-02T23:52:55","slug":"ebitda-to-fcf","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/ebitda-to-fcf\/","title":{"rendered":"EBITDA to FCF: Interview Question and Modeling Test Walkthrough"},"content":{"rendered":"<blockquote><p><strong>EBITDA to FCF Definition:<\/strong> FCF = EBITDA \u2013 Net Interest Expense \u2013 Taxes +\/- Other Non-Cash Adjustments +\/- Change in Working Capital \u2013 CapEx; also, always clarify <em>which type<\/em> of Free Cash Flow you\u2019re calculating since the formula changes for other FCF variations.<\/p><\/blockquote>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31072 size-full\" title=\"EBITDA to FCF - Basic Calculation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114046\/01-EBITDA-to-FCF.jpg\" alt=\"EBITDA to FCF - Basic Calculation\" width=\"2048\" height=\"562\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114046\/01-EBITDA-to-FCF.jpg 2048w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114046\/01-EBITDA-to-FCF-300x82.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114046\/01-EBITDA-to-FCF-1024x281.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114046\/01-EBITDA-to-FCF-768x211.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114046\/01-EBITDA-to-FCF-1536x422.jpg 1536w\" sizes=\"(max-width: 2048px) 100vw, 2048px\" \/><\/p>\n<p>This definition assumes the \u201cstandard\u201d <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/how-to-calculate-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Free Cash Flow<\/a> that is used in <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/\" target=\"_blank\" rel=\"noopener\">LBO models<\/a> and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/\" target=\"_blank\" rel=\"noopener\">financial statement analysis<\/a>, but there are other variations (see below).<\/p>\n<p>In <a href=\"https:\/\/mergersandinquisitions.com\/investment-banking-interview-questions-and-answers\/\" target=\"_blank\" rel=\"noopener\">investment banking interviews<\/a>, it\u2019s common to get questions about <em>different ways<\/em> to calculate metrics such as Free Cash Flow.<\/p>\n<p>Unfortunately, many of the online tutorials for this topic skip the subtleties in the calculation and gloss over issues like lease accounting.<\/p>\n<p>Outside of pure interview questions, this \u201cEBITDA to FCF\u201d question matters because, in many case studies and modeling tests, you will get a template or existing model and be asked to calculate other metrics based on EBITDA.<\/p>\n<p><strong>You must understand the <em>type<\/em> of Free Cash Flow you are calculating and the items it should deduct \u2013 if you know that, you\u2019ll be able to calculate it starting with any metric.<\/strong><\/p>\n<p>We cover a few examples, variations, subtleties, and lease accounting issues below:<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Financial-Statement-Analysis\/EBITDA-to-FCF\/101-09-EBITDA-to-FCF-Slides.pdf\" target=\"_blank\" rel=\"noopener\">EBITDA to FCF &#8211; Slides (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Financial-Statement-Analysis\/EBITDA-to-FCF\/101-09-EBITDA-to-FCF-BMC.xlsx\" target=\"_blank\" rel=\"noopener\">EBITDA to FCF &#8211; Excel Demonstration (XL)<\/a><\/li>\n<\/ul>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>4:21:<\/strong> Part 1: Alternate Ways to Calculate FCF<\/li>\n<li><strong>7:32:<\/strong> Part 2: EBITDA to FCFE and FCFF<\/li>\n<li><strong>9:37:<\/strong> Part 3: Subtleties in the Calculations<\/li>\n<li><strong>12:06:<\/strong> Part 4: Lease Accounting (Your Favorite Topic)<\/li>\n<li><strong>14:14:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><strong>EBITDA to FCF Definitions: What is Free Cash Flow?<\/strong><\/h2>\n<p><strong>Free Cash Flow<\/strong> is normally defined as Cash Flow from Operations \u2013 Capital Expenditures, <em>assuming<\/em> that Cash Flow from Operations deducts the Net Interest Expense, Taxes, and the full Lease Expense.<\/p>\n<p>(If it does not fully deduct all of these, you must adjust it.)<\/p>\n<p>FCF tells you how much Debt principal the company could repay or how much it could spend on activities such as acquisitions, dividends, or stock repurchases.<\/p>\n<p>In LBO models and credit models, it partially determines the \u201coptional repayments\u201d the company can make on its Debt balance (i.e., the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/cash-flow-sweep\/\" target=\"_blank\" rel=\"noopener\">cash flow sweep<\/a>).<\/p>\n<p>You could also calculate Free Cash Flow by starting with Net Income:<\/p>\n<p><strong>FCF<\/strong> = Net Income (to Common) + D&amp;A +\/- Other Non-Cash Adjustments +\/- Change in Working Capital \u2013 CapEx.<\/p>\n<p>Here\u2019s an example calculation for BMC Stock Holdings, a building materials company:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31073 size-full\" title=\"Net Income to FCF\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114232\/02-Net-Income-to-FCF.jpg\" alt=\"Net Income to FCF\" width=\"2064\" height=\"444\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114232\/02-Net-Income-to-FCF.jpg 2064w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114232\/02-Net-Income-to-FCF-300x65.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114232\/02-Net-Income-to-FCF-1024x220.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114232\/02-Net-Income-to-FCF-768x165.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114232\/02-Net-Income-to-FCF-1536x330.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114232\/02-Net-Income-to-FCF-2048x441.jpg 2048w\" sizes=\"(max-width: 2064px) 100vw, 2064px\" \/><\/p>\n<p>It\u2019s the same basic idea as Cash Flow from Operations minus CapEx because the first 3 terms in this formula <em>represent<\/em> Cash Flow from Operations:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31074 size-full\" title=\"Net Income to Free Cash Flow Equivalency\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114307\/03-FCF-Both-Methods.jpg\" alt=\"Net Income to Free Cash Flow Equivalency\" width=\"2056\" height=\"600\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114307\/03-FCF-Both-Methods.jpg 2056w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114307\/03-FCF-Both-Methods-300x88.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114307\/03-FCF-Both-Methods-1024x299.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114307\/03-FCF-Both-Methods-768x224.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114307\/03-FCF-Both-Methods-1536x448.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114307\/03-FCF-Both-Methods-2048x598.jpg 2048w\" sizes=\"(max-width: 2056px) 100vw, 2056px\" \/><\/p>\n<p>To move <em>from<\/em> EBITDA to FCF, factor in all the items that affect FCF but <em>not<\/em> EBITDA:<\/p>\n<p><strong>FCF<\/strong> = EBITDA \u2013 Net Interest Expense \u2013 Taxes +\/- Other Non-Cash Adjustments +\/- Change in Working Capital \u2013 CapEx.<\/p>\n<p>The tricky part is that you can\u2019t just multiply EBITDA by the Tax Rate to calculate the Taxes.<\/p>\n<p>Instead, you should deduct the D&amp;A and Interest Expense from EBITDA to calculate Pre-Tax Income and then multiply that by the Tax Rate because these items are <strong>tax-deductible<\/strong>.<\/p>\n<p>In other words, \u201cTaxes\u201d in this calculation equal (EBITDA \u2013 D&amp;A \u2013 Net Interest) * Tax Rate:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31075 size-full\" title=\"Taxes in the FCF Calculation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114334\/04-FCF-Taxes.jpg\" alt=\"Taxes in the FCF Calculation\" width=\"2058\" height=\"811\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114334\/04-FCF-Taxes.jpg 2058w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114334\/04-FCF-Taxes-300x118.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114334\/04-FCF-Taxes-1024x404.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114334\/04-FCF-Taxes-768x303.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114334\/04-FCF-Taxes-1536x605.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114334\/04-FCF-Taxes-2048x807.jpg 2048w\" sizes=\"(max-width: 2058px) 100vw, 2058px\" \/><\/p>\n<p>The \u201cOther Non-Cash Adjustments\u201d term might also have additional adjustments for Deferred Taxes, as FCF should always reflect a company\u2019s Cash Taxes.<\/p>\n<h2><strong>From EBITDA to FCF\u2026 of Different Types<\/strong><\/h2>\n<p>There are also different <em>types<\/em> of Free Cash Flow: <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/unlevered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Unlevered Free Cash Flow<\/a>, also known as Free Cash Flow to Firm, and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/levered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Levered Free Cash Flow<\/a>, also known as Free Cash Flow to Equity.<\/p>\n<p>In most cases, it\u2019s pointless to walk through these bridges because these metrics are typically used for valuation purposes, such as in a <a href=\"https:\/\/mergersandinquisitions.com\/dcf-model\/\" target=\"_blank\" rel=\"noopener\">DCF model<\/a>, and you rarely build an entire DCF starting from EBITDA.<\/p>\n<p>For completeness, however, we\u2019ll walk through both bridges below.<\/p>\n<p><strong>EBITDA to FCFE<\/strong> is easier because FCFE is close to normal FCF: Take FCF, add Debt Issuances, and subtract Debt Repayments.<\/p>\n<p><strong>FCFE<\/strong> = EBITDA \u2013 Net Interest Expense \u2013 Taxes +\/- Other Non-Cash Adjustments +\/- Change in Working Capital \u2013 CapEx + Debt Issuances \u2013 Debt Repayments<\/p>\n<p><strong>EBITDA to FCFF<\/strong> is shorter but requires more explanation:<\/p>\n<p><strong>FCFF<\/strong> = EBITDA \u2013 Taxes Excluding Impact of Interest +\/- Other Non-Cash Adjustments +\/- Change in Working Capital \u2013 CapEx<\/p>\n<p>\u201cTaxes Excluding Impact of Interest\u201d means what it sounds like: Deduct D&amp;A, but not Net Interest Expense, to calculate Taxes.<\/p>\n<p>FCFF or Unlevered Free Cash Flow is capital structure-neutral, so the company should pay the same amount of Taxes regardless of its Debt:<\/p>\n<p><strong>FCFF<\/strong> = EBITDA \u2013 EBIT * Tax Rate +\/- Other Non-Cash Adjustments +\/- Change in Working Capital \u2013 CapEx<\/p>\n<p>Here are the calculations for BMC Stock Holdings, a building materials company used as an example in our courses:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31076 size-full\" title=\"EBITDA to FCFF Variation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114358\/05-EBITDA-to-FCFF.jpg\" alt=\"EBITDA to FCFF Variation\" width=\"2074\" height=\"412\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114358\/05-EBITDA-to-FCFF.jpg 2074w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114358\/05-EBITDA-to-FCFF-300x60.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114358\/05-EBITDA-to-FCFF-1024x203.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114358\/05-EBITDA-to-FCFF-768x153.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114358\/05-EBITDA-to-FCFF-1536x305.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114358\/05-EBITDA-to-FCFF-2048x407.jpg 2048w\" sizes=\"(max-width: 2074px) 100vw, 2074px\" \/><\/p>\n<h2><strong>Subtleties in the EBITDA to FCF Calculation<\/strong><\/h2>\n<p>The examples above represent the basic calculations and simple responses that work in interviews, but <strong>real life<\/strong> is more complicated.<\/p>\n<p>Note that \u201creal life\u201d includes <a href=\"https:\/\/mergersandinquisitions.com\/3-statement-model\/\" target=\"_blank\" rel=\"noopener\">3-statement modeling<\/a> and <a href=\"https:\/\/mergersandinquisitions.com\/lbo-modeling-test\/\" target=\"_blank\" rel=\"noopener\">LBO modeling tests<\/a>!<\/p>\n<p>We\u2019ll approach this section by explaining how the main deductions and adjustments in the calculation can be more complex in real life:<\/p>\n<p><strong>FCF<\/strong> = EBITDA \u2013 Net Interest Expense \u2013 Taxes +\/- Other Non-Cash Adjustments +\/- Change in Working Capital \u2013 CapEx<\/p>\n<p><strong>First<\/strong>, if the company has Preferred Stock, you must also deduct the Preferred Dividends along with the Net Interest since they\u2019re also a financing cost:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31077 size-full\" title=\"Preferred Dividends in Free Cash Flow\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114435\/06-FCF-Preferred-Dividends.jpg\" alt=\"Preferred Dividends in Free Cash Flow\" width=\"1704\" height=\"1218\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114435\/06-FCF-Preferred-Dividends.jpg 1704w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114435\/06-FCF-Preferred-Dividends-300x214.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114435\/06-FCF-Preferred-Dividends-1024x732.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114435\/06-FCF-Preferred-Dividends-768x549.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114435\/06-FCF-Preferred-Dividends-1536x1098.jpg 1536w\" sizes=\"(max-width: 1704px) 100vw, 1704px\" \/><\/p>\n<p>Similarly, anything like \u201cOther Income\u201d or \u201cOther Expenses\u201d above the Pre-Tax Income line should be factored in because FCF should capture <em>everything that affects the after-tax profits.<\/em><\/p>\n<p>We use this approach in the BMC model, even though \u201cOther Income\u201d is small.<\/p>\n<p><strong>Second<\/strong>, Taxes can be tricky because you should technically subtract the company\u2019s <em>Cash Taxes<\/em>.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>So, if the company is using accelerated Depreciation or has items such as Stock-Based Compensation that are <em>not<\/em> tax-deductible in the current period, you should adjust the Tax number or include the effects in the \u201cOther Non-Cash Adjustments\u201d section, as we do in the BMC model.<\/p>\n<p><strong>Third<\/strong>, the \u201cChange in Working Capital\u201d sometimes includes more than just the explicit line items in that section.<\/p>\n<p>For example, consider this Netflix financial model:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31078 size-full\" title=\"Netflix Content Assets and Liabilities in Free Cash Flow\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114517\/07-Netflix-Content-Assets-Liabilities.jpg\" alt=\"Netflix Content Assets and Liabilities in Free Cash Flow\" width=\"1834\" height=\"1054\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114517\/07-Netflix-Content-Assets-Liabilities.jpg 1834w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114517\/07-Netflix-Content-Assets-Liabilities-300x172.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114517\/07-Netflix-Content-Assets-Liabilities-1024x588.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114517\/07-Netflix-Content-Assets-Liabilities-768x441.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114517\/07-Netflix-Content-Assets-Liabilities-1536x883.jpg 1536w\" sizes=\"(max-width: 1834px) 100vw, 1834px\" \/><\/p>\n<p>For a firm like Netflix, these \u201cContent Assets\u201d and \u201cContent Liabilities\u201d <em>are<\/em> \u201cChanges in Working Capital\u201d because they represent content spending.<\/p>\n<p>Netflix must purchase and develop streaming content if it wants to grow, so changes in these items are a core part of its business.<\/p>\n<p>Therefore, if you calculate FCF starting with EBITDA, you should <em>definitely<\/em> include these.<\/p>\n<p><strong>Finally<\/strong>, with the CapEx deduction, in some cases, you should also deduct items such as Intangible Purchases and Acquisitions\u2026 if they are truly recurring and core to the business.<\/p>\n<p>For example, if you\u2019re modeling a pharmaceutical company that constantly needs to acquire new drugs to remain competitive, you could easily justify a deduction for recurring Intangible Purchases.<\/p>\n<p>But it would be more difficult to justify for a restaurant or retail company.<\/p>\n<h2><strong>Lease Accounting in the EBITDA to FCF Calculation<\/strong><\/h2>\n<p>One final wrinkle is the issue of <a href=\"https:\/\/mergersandinquisitions.com\/lease-accounting\/\" target=\"_blank\" rel=\"noopener\">lease accounting<\/a> and how the rules changed when IFRS 16 and ASC 842 were implemented in 2019.<\/p>\n<p><strong>To simplify things, we recommend always deducting the full Lease Expense from both Operating and Finance Leases in FCF, no matter how it appears on the financial statements.<\/strong><\/p>\n<p>That translates into the following:<\/p>\n<ul>\n<li>Under <strong>U.S. GAAP<\/strong>, the Operating Lease Expense is already deducted on the Income Statement and reduces EBITDA, so you don\u2019t need to do anything else. However, if the company has Finance Leases, you should deduct the Finance Lease Interest and Principal Repayments, which you may need to search for in the filings. If these items are small, this point makes a tiny difference and can be ignored.<\/li>\n<li>Under <strong>IFRS<\/strong>, you should deduct the Total Lease Interest and Total Lease Principal Repayments when moving from EBITDA to FCF. The Lease Interest is usually within the Net Interest Expense on the Income Statement, but if it\u2019s not, you will need to create a separate line for it. To get the Lease Principal Repayments, you must look under Cash Flow from Financing on the Cash Flow Statement.<\/li>\n<\/ul>\n<p>In addition, there may also be a small \u201cnet cash effect\u201d from the Lease Assets and Liabilities changing by slightly different amounts each year; you can include this as another adjustment with the Lease Principal Repayment deduction.<\/p>\n<p>Here&#8217;s an example of the EBITDA to FCF calculation for Watches of Switzerland in our <a href=\"https:\/\/breakingintowallstreet.com\/private-equity-modeling\/\" target=\"_blank\" rel=\"noopener\">Private Equity Modeling course<\/a>:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31079 size-full\" title=\"EBITDA to FCF Calculation with IFRS 16 Lease Accounting\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114553\/08-IFRS-EBITDA-to-FCF.jpg\" alt=\"EBITDA to FCF Calculation with IFRS 16 Lease Accounting\" width=\"1774\" height=\"1610\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114553\/08-IFRS-EBITDA-to-FCF.jpg 1774w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114553\/08-IFRS-EBITDA-to-FCF-300x272.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114553\/08-IFRS-EBITDA-to-FCF-1024x929.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114553\/08-IFRS-EBITDA-to-FCF-768x697.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/02\/26114553\/08-IFRS-EBITDA-to-FCF-1536x1394.jpg 1536w\" sizes=\"(max-width: 1774px) 100vw, 1774px\" \/><\/p>\n<p>Under IFRS, EBITDA <em>excludes<\/em> the entire Lease Expense, so we need to deduct the Lease Interest (included within \u201cNet Interest Expense\u201d here) and the Lease Principal Repayments (in the \u201cIFRS 16 Lease Adjustments\u201d line) to get a proper number.<\/p>\n<p>You can also get the same effect by adjusting Depreciation to remove the Lease Depreciation portion, but it\u2019s faster and easier to deduct the Lease Principal Repayment line since it\u2019s always shown explicitly on the Cash Flow Statement.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>FCF = EBITDA \u2013 Net Interest Expense \u2013 Taxes +\/- Other Non-Cash Adjustments +\/- Change in Working Capital \u2013 CapEx; also, always clarify which type of Free Cash Flow you\u2019re calculating since the formula changes for other FCF variations.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-31071","biws_kb","type-biws_kb","status-publish","hentry","kb_category-financial-statement-analysis"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/31071","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=31071"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}