Sir, I have a follow up question regarding this >>"What about Purchase of Intangibles?" ANSWER: Maybe - if they’re truly recurring and you count the Amortization from them (depends on the company and industry)
Yes, obviously there is only amortization for intangibles with definite lives, but even indefinite-lived intangibles will eventually be written down; the question is not "if," but "when." This is why even indefinite-lived intangibles result in a Deferred Tax Liability under purchase price accounting. If the company is purchasing significant indefinite-lived intangibles and they contribute to its core business, those purchases should be counted in the Unlevered FCF calculation. If you think about it, the amortization of intangibles and the write-down of intangibles do not really affect anything in the analysis because neither one is cash-tax deductible in most cases. You deduct them to calculate EBIT and NOPAT, but then you have to adjust the Deferred Tax line item to reflect that these items were not truly cash-tax deductible (if the company provides enough detail to do this! Many do not, so we often just group D&A together and ignore this issue). So... if you actually have this scenario where the company is spending a lot on intangibles, the easiest method is probably to separate out Depreciation from Amortization and Write-Downs, make Depreciation reduce Taxes, and NOPAT, and then just leave out Amortization and Write-Downs of Intangibles entirely.
Thanks for your content, but I got one question: Why do we use the tax expense from EBIT directly and not the actual tax expense? For example: If EBIT=1000 then NOPAT would be 700 (assuming 30% tax). If we know that interest expenses are e.g. 100, why don't we subtract 270 (EBT=900*30%) from EBIT instead (which would be 730). Since FCFF represents the cashflow available to ALL investors, the cash attributable to equity holders would be 630 (net income=1000-100-270) and the cash attributable to debt holders would be 100, in total 730 and not 700. Taxes would be overstated by 30 and therefore FCFF is understated by 30. Is my thinking correct and can I use this approach as well?
You can't give the company credit for the "tax shield" in UFCF because UFCF is capital structure-neutral. So if you're saying that the company's Debt vs. Equity split is irrelevant, you can't then turn around and say that they pay X% less in Taxes because they have a certain Debt balance or Interest Expense.
Hi, thanks for your effort as always. I have a question regarding on working capital calculation. Should I reverse all the signs of the working capital section since increase on inventories is cash out while increase on liabilities is cash in? Or should I just calculate it as stated in the statement? Having a hard time to understand this. Thank you.
The Cash Flow Statement shows the correct signs as-is for all the Change in Working Capital line items, so you should go by that. Do not attempt to reconcile the historical line item values to the "Change" values shown on the CFS, as it will never work due to issues like companies grouping items differently on the statements.
Ignore it if the charge is not already deducted in the line item. If the charge is already deducted in the line item, add it back so that it no longer reduces that line item.
Great video, thanks. Question! if you're doing a project appraisal, and you borrow funds for necessary equipment & have to pay a 50k downpayment and annual payments of say $10k for 5 years. (Q1) is the 50k downpayment part of the outlay? and I understand why we won't include interest payments (because it's accounted for in WACC). However (Q2) are you saying that we should not include the annual loan repayments of $10k because it only affects debt investors?
If your goal is to assess the project on a capital structure-neutral basis, you should count the ENTIRE price of the equipment, not just the down payment, as the initial cash outflow, and then ignore interest and loan repayments in the projections. You're pretending as if you used 100% cash to make the purchase.
Hi Brian, I have a question with regard to the timing of Unlevered FCF. If UFCFs in Q1,Q2,Q3 are, for example, 970, 1208, 868, respectively, and then turn into (143) in the Q4, should we use the UFCF (Q4) as a whole for our projections or we have to make some adjustments? If so, how would you adjust these CFs? (Assuming my formula and items are correct as instructed by Breaking into WS) As always, thank you for giving the community your very best video tutorial about Wall Street. I have been a fan of yours for 1,5 years and will be so for years. Lam Tran
?? I'm not really sure what you're asking. Are you referring to a Q4 stub period? If you're valuing the company at the end of Q3 and need to use the Q4 cash flow in the stub period and it's negative, yes, you use the negative number. If it turns positive in the full years after that, you use the positive UFCF figures in those years.
We don't currently cover Project Finance, so I can't answer this one for you. If we add this coverage at some point, we will release some tutorials on PF.
Thanks for the video, question: Isn't stock-based compensation part of SGA (Selling, General & Administrative)? Should it be seen as a core-business expense and therefore, effectively, be reduced from the unlevered free cashflow, or should it be added back, as it's not seen as a core-business expense, effectively be added back to the unlevered free cashflow by correcting the SGA expense?
We address Stock-Based Compensation here and in the separate video on SBC in a DCF. It should always be counted as a true cash expense and should always reduce Unlevered FCF because it results in more shares, which reduces the company's implied per-share value. You should NOT add it back as a non-cash expense because it is not a non-cash expense in the same way that D&A is (i.e., simple timing difference). It actually changes the company's value on a per-share basis, so it must be considered a real cash expense.
Hey Brain, when calculating NOPAT should we account for the interest saving via tax expense or would this already be accounted for in WACC (After Tax Cost of Debt)?
You never do this when calculating NOPAT because there is no tax shield very interest, as NOPAT is capital structure-neutral. You can't claim tax savings if you're not assuming anything for the debt and equity percentages. So the taxes should be independent of interest income and interest expense.
Just a question, Before NOPAT at around 10:35, why didn't you add back asset impairment before calculating book taxes as you mentioned earlier. I seem to be missing something. Great tutorial though
We're calculating Book Taxes as if one-time charges such as impairments and write-downs never existed in both the historical and future periods. Yes, this may create issues for Deferred Taxes, but if they're relatively small, it doesn't really matter.
is deposit considered as working capital? eg: rental deposit collected from tenant. or we need to ignore it? provided the rental collection is the core business.
I would consider Rental Deposits a part of Working Capital if the company's core business is rental collection, but you should follow whatever the company does in its statements.
Hey Brian, I´m currently working on a model and something striked me. The revenue growth of the company is around 3% per year but the unlevered FCF growth is around 20% per year. EBIT growth for that given year was at 6,50 %. What strikes me for example is that on the CF statement the expenses year to year are extremely different. Other Non Cash Items FY 1 = - 190 ; FY2 + 190, allon that accounts to a difference of 280 Mil. I´m just struggling how to interpret that and what the company did better, it all seems pretty random. CF grows big but EBIT grows small.
It's impossible to say without knowing the company and seeing its financial statements, but you should probably look at longer-term trends over 10-15 years is one of the recent years has odd numbers.
While this video is helpful in understanding the components of unlevered free cash flow (UFCF), there are some big picture items that ought to be explained. For example, would a good way to calculate the UFCF be to use "Net cash provided by operating activities" from the Cash Flows Statement (under "Operating Activities), but then subtract interest expenses adjusted for the tax benefit (derived from the Income Statement), assuming no other unusual items in that part of the Cash Flows Statement? And another big picture question is what discount rate assumption should be made to match the use of UFCF. Many valuation specialists compute a Weighted Average Cost of Capital (WAAC), which involves a cost of equity component and a cost of debt component, and then use that as the discount rate. But this seems illogical, since our cash flows exclude the impact of debt. Rather, it would seem far more logical to simply apply the calculated cost of equity as the discount rate, not a WAAC, since financing isn't even considered in the UFCFs, the numerator in this DCF model. If a DCF model is truly "debt-free," then it would seem logical that all aspects of the DCF assume zero debt (and corresponding zero interest rate charges) Please 'splain. Or consider making a separate video explaining the logical matching of the form of cash flows to the calculation of the discount rate in a DCF model.
You are asking about things that cannot possibly be covered in a 15-20-minute introductory video on the topic. For example, WACC is a whole separate topic that is covered in separate tutorials here. If we tried to cover all these points upfront, this would be a 1-hour-long video instead, and no one would watch. 1) Starting with Cash Flow from Operations is a bad way to calculate UFCF because too many adjustments are required, people get in arguments about which items to include/exclude, the proper tax rate and tax provision, etc. Strongly recommend against this. 2) WACC pairs with Unlevered Free Cash Flow. If you understand the meaning of these terms, it's perfectly logical: WACC represents all investor groups in the company, and Unlevered Free Cash Flow is *available to all investors in the company.* It's available to both shareholders and lenders because interest expense has not yet been subtracted, dividends haven't been subtracted, etc. That is the whole point of using this metric. That is also why these items pair with Enterprise Value... because it represents all investors in the company. The key question is to which investor group(s) is the item available, or which investor group(s) does the item represent.
Can you explain why we adjust for deferred tax in unlevered FCF calculation? Year 1 you show an adj of 37.9, is that the difference between book tax payables and actual cash taxes?
Because in a DCF, you always want to reflect the *cash taxes* that the company pays, which differ from the book taxes shown on its Income Statement. The Deferred Tax line item(s) on the CFS represents this difference, so you can calculate cash taxes by taking book taxes and adding/subtracting the Deferred Tax line item. We did not look at the Balance Sheet to calculate it here; we just took the historical numbers from the company's Cash Flow Statement. Companies' Balance Sheets often do not match up exactly with their Cash Flow Statements for various reasons, so it's best to use the direct CFS numbers whenever possible.
@@chongzhu9875 Because you should not project Impairments in future periods, and even if you did project them, you would add them back in the projections because they're non-cash charges. So, they would reduce EBIT and then you would add them back near the D&A and Deferred Tax line items because they're non-cash. Impairments are generally not cash-tax deductible, so you would have to adjust the company's cash taxes as well. In the historical periods here, we adjusted by adding the Impairments to EBIT to get higher NOPAT figures so they are more comparable to the projected figures.
Ignore any interest-related items. Tax items should not be within the Change in WC, but if they are, you can factor them in if they seem to be recurring.
I would recommend taking a course on Udemy if you're looking for something in that price range. We offer highly specialized courses that are relevant for people looking to get into the most competitive, highest-paying jobs (e.g., investment banking and private equity). Everything is laid out pretty clearly on our Courses page (breakingintowallstreet.com/biws/breaking-into-wall-street-courses/). Jobs such as IB and PE often pay $150K to $300K for entry-level roles, so there is considerable willingness to pay more than 30 - 50€ to gain an advantage. As far as our marketing being bad: well, we now have 40,000 customers, major corporations like Wells Fargo use our training for analysts, and we've grown 10x since launching in 2009... so we must be doing something right. If it's not for you, that's fine - not everyone likes our approach, some people don't like us, some people think it's too expensive, etc. If that's you, you can still look at our free content and then sign up for a book or non-specialized course on a site like Udemy to learn more.
![What is Free Cash Flow? [REVISED] Meaning, Calculations, Variations, and IFRS Differences](http://i.ytimg.com/vi/A1lS4KnANBw/mqdefault.jpg)
![What is Free Cash Flow? [REVISED] Meaning, Calculations, Variations, and IFRS Differences](/img/tr.png)
![Working Capital and the Change in Working Capital in Valuation and Financial Modeling [REVISED]](http://i.ytimg.com/vi/tMgty8jwmHI/mqdefault.jpg)
![Levered Free Cash Flow and the Levered DCF [SEE THE IMPORTANT NOTE BELOW THE VIDEO]](/img/n.gif)
good to see you are still releasing!
thank you man!
nil ive searhed loads for good youtube channels and tis is the most thorough, compact and easy to follow
Thanks for watching!
This was excellent. Thank you.
Thanks for watching!
Sir, I have a follow up question regarding this
>>"What about Purchase of Intangibles?"
ANSWER: Maybe - if they’re truly recurring and you count the Amortization from them (depends on the company and industry)
Yes, obviously there is only amortization for intangibles with definite lives, but even indefinite-lived intangibles will eventually be written down; the question is not "if," but "when." This is why even indefinite-lived intangibles result in a Deferred Tax Liability under purchase price accounting.
If the company is purchasing significant indefinite-lived intangibles and they contribute to its core business, those purchases should be counted in the Unlevered FCF calculation.
If you think about it, the amortization of intangibles and the write-down of intangibles do not really affect anything in the analysis because neither one is cash-tax deductible in most cases. You deduct them to calculate EBIT and NOPAT, but then you have to adjust the Deferred Tax line item to reflect that these items were not truly cash-tax deductible (if the company provides enough detail to do this! Many do not, so we often just group D&A together and ignore this issue).
So... if you actually have this scenario where the company is spending a lot on intangibles, the easiest method is probably to separate out Depreciation from Amortization and Write-Downs, make Depreciation reduce Taxes, and NOPAT, and then just leave out Amortization and Write-Downs of Intangibles entirely.
Thanks for your content, but I got one question: Why do we use the tax expense from EBIT directly and not the actual tax expense? For example: If EBIT=1000 then NOPAT would be 700 (assuming 30% tax). If we know that interest expenses are e.g. 100, why don't we subtract 270 (EBT=900*30%) from EBIT instead (which would be 730). Since FCFF represents the cashflow available to ALL investors, the cash attributable to equity holders would be 630 (net income=1000-100-270) and the cash attributable to debt holders would be 100, in total 730 and not 700. Taxes would be overstated by 30 and therefore FCFF is understated by 30. Is my thinking correct and can I use this approach as well?
You can't give the company credit for the "tax shield" in UFCF because UFCF is capital structure-neutral. So if you're saying that the company's Debt vs. Equity split is irrelevant, you can't then turn around and say that they pay X% less in Taxes because they have a certain Debt balance or Interest Expense.
Hi, thanks for your effort as always.
I have a question regarding on working capital calculation.
Should I reverse all the signs of the working capital section since increase on inventories is cash out while increase on liabilities is cash in?
Or should I just calculate it as stated in the statement?
Having a hard time to understand this.
Thank you.
The Cash Flow Statement shows the correct signs as-is for all the Change in Working Capital line items, so you should go by that. Do not attempt to reconcile the historical line item values to the "Change" values shown on the CFS, as it will never work due to issues like companies grouping items differently on the statements.
Hello, Brian. Could you pls clarify once again, what is meant by word "exclude" - ignore (not add, not subtract?
Ignore it if the charge is not already deducted in the line item. If the charge is already deducted in the line item, add it back so that it no longer reduces that line item.
Great video, thanks. Question! if you're doing a project appraisal, and you borrow funds for necessary equipment & have to pay a 50k downpayment and annual payments of say $10k for 5 years. (Q1) is the 50k downpayment part of the outlay? and I understand why we won't include interest payments (because it's accounted for in WACC). However (Q2) are you saying that we should not include the annual loan repayments of $10k because it only affects debt investors?
If your goal is to assess the project on a capital structure-neutral basis, you should count the ENTIRE price of the equipment, not just the down payment, as the initial cash outflow, and then ignore interest and loan repayments in the projections. You're pretending as if you used 100% cash to make the purchase.
Hi Brian,
I have a question with regard to the timing of Unlevered FCF. If UFCFs in Q1,Q2,Q3 are, for example, 970, 1208, 868, respectively, and then turn into (143) in the Q4, should we use the UFCF (Q4) as a whole for our projections or we have to make some adjustments? If so, how would you adjust these CFs? (Assuming my formula and items are correct as instructed by Breaking into WS)
As always, thank you for giving the community your very best video tutorial about Wall Street. I have been a fan of yours for 1,5 years and will be so for years.
Lam Tran
?? I'm not really sure what you're asking. Are you referring to a Q4 stub period? If you're valuing the company at the end of Q3 and need to use the Q4 cash flow in the stub period and it's negative, yes, you use the negative number. If it turns positive in the full years after that, you use the positive UFCF figures in those years.
For a project finance, you have cumulative deferred taxes, and interest expenses. Should I use the tax rate or effective tax rate, upon EBIT?
We don't currently cover Project Finance, so I can't answer this one for you. If we add this coverage at some point, we will release some tutorials on PF.
Thanks for the video, question: Isn't stock-based compensation part of SGA (Selling, General & Administrative)? Should it be seen as a core-business expense and therefore, effectively, be reduced from the unlevered free cashflow, or should it be added back, as it's not seen as a core-business expense, effectively be added back to the unlevered free cashflow by correcting the SGA expense?
We address Stock-Based Compensation here and in the separate video on SBC in a DCF. It should always be counted as a true cash expense and should always reduce Unlevered FCF because it results in more shares, which reduces the company's implied per-share value.
You should NOT add it back as a non-cash expense because it is not a non-cash expense in the same way that D&A is (i.e., simple timing difference). It actually changes the company's value on a per-share basis, so it must be considered a real cash expense.
Please make video of Deferred Tax and Income Tax for modeling purpose.
Various other tutorials in this channel deal with these concepts (see the ones on NOLs, purchase price allocation, etc.).
Hey Brain, when calculating NOPAT should we account for the interest saving via tax expense or would this already be accounted for in WACC (After Tax Cost of Debt)?
You never do this when calculating NOPAT because there is no tax shield very interest, as NOPAT is capital structure-neutral. You can't claim tax savings if you're not assuming anything for the debt and equity percentages. So the taxes should be independent of interest income and interest expense.
I do not see the excel file below the video as mentioned by you in the video. Thanks
Click "Show More" and scroll to Resources and try the links there.
Just a question, Before NOPAT at around 10:35, why didn't you add back asset impairment before calculating book taxes as you mentioned earlier. I seem to be missing something. Great tutorial though
We're calculating Book Taxes as if one-time charges such as impairments and write-downs never existed in both the historical and future periods. Yes, this may create issues for Deferred Taxes, but if they're relatively small, it doesn't really matter.
@@financialmodeling Thank you for clarifying
is deposit considered as working capital? eg: rental deposit collected from tenant. or we need to ignore it? provided the rental collection is the core business.
I would consider Rental Deposits a part of Working Capital if the company's core business is rental collection, but you should follow whatever the company does in its statements.
Great video
Thanks for watching!
Hey Brian, I´m currently working on a model and something striked me. The revenue growth of the company is around 3% per year but the unlevered FCF growth is around 20% per year. EBIT growth for that given year was at 6,50 %. What strikes me for example is that on the CF statement the expenses year to year are extremely different. Other Non Cash Items FY 1 = - 190 ; FY2 + 190, allon that accounts to a difference of 280 Mil. I´m just struggling how to interpret that and what the company did better, it all seems pretty random. CF grows big but EBIT grows small.
It's impossible to say without knowing the company and seeing its financial statements, but you should probably look at longer-term trends over 10-15 years is one of the recent years has odd numbers.
While this video is helpful in understanding the components of unlevered free cash flow (UFCF), there are some big picture items that ought to be explained. For example, would a good way to calculate the UFCF be to use "Net cash provided by operating activities" from the Cash Flows Statement (under "Operating Activities), but then subtract interest expenses adjusted for the tax benefit (derived from the Income Statement), assuming no other unusual items in that part of the Cash Flows Statement? And another big picture question is what discount rate assumption should be made to match the use of UFCF. Many valuation specialists compute a Weighted Average Cost of Capital (WAAC), which involves a cost of equity component and a cost of debt component, and then use that as the discount rate. But this seems illogical, since our cash flows exclude the impact of debt. Rather, it would seem far more logical to simply apply the calculated cost of equity as the discount rate, not a WAAC, since financing isn't even considered in the UFCFs, the numerator in this DCF model. If a DCF model is truly "debt-free," then it would seem logical that all aspects of the DCF assume zero debt (and corresponding zero interest rate charges) Please 'splain. Or consider making a separate video explaining the logical matching of the form of cash flows to the calculation of the discount rate in a DCF model.
You are asking about things that cannot possibly be covered in a 15-20-minute introductory video on the topic. For example, WACC is a whole separate topic that is covered in separate tutorials here. If we tried to cover all these points upfront, this would be a 1-hour-long video instead, and no one would watch.
1) Starting with Cash Flow from Operations is a bad way to calculate UFCF because too many adjustments are required, people get in arguments about which items to include/exclude, the proper tax rate and tax provision, etc. Strongly recommend against this.
2) WACC pairs with Unlevered Free Cash Flow. If you understand the meaning of these terms, it's perfectly logical: WACC represents all investor groups in the company, and Unlevered Free Cash Flow is *available to all investors in the company.* It's available to both shareholders and lenders because interest expense has not yet been subtracted, dividends haven't been subtracted, etc. That is the whole point of using this metric.
That is also why these items pair with Enterprise Value... because it represents all investors in the company.
The key question is to which investor group(s) is the item available, or which investor group(s) does the item represent.
@@financialmodeling Thanks for your thoughtful reply.
Can you explain why we adjust for deferred tax in unlevered FCF calculation? Year 1 you show an adj of 37.9, is that the difference between book tax payables and actual cash taxes?
Nvm, post too quickly before the end of video. About the 37.9 though, do you get it by taking the y-o-y change in dta and dtl balances?
Because in a DCF, you always want to reflect the *cash taxes* that the company pays, which differ from the book taxes shown on its Income Statement. The Deferred Tax line item(s) on the CFS represents this difference, so you can calculate cash taxes by taking book taxes and adding/subtracting the Deferred Tax line item. We did not look at the Balance Sheet to calculate it here; we just took the historical numbers from the company's Cash Flow Statement.
Companies' Balance Sheets often do not match up exactly with their Cash Flow Statements for various reasons, so it's best to use the direct CFS numbers whenever possible.
@@financialmodeling Could you explain why impairments are not subtracted, aren't they noncash charges?
@@chongzhu9875 Because you should not project Impairments in future periods, and even if you did project them, you would add them back in the projections because they're non-cash charges. So, they would reduce EBIT and then you would add them back near the D&A and Deferred Tax line items because they're non-cash. Impairments are generally not cash-tax deductible, so you would have to adjust the company's cash taxes as well. In the historical periods here, we adjusted by adding the Impairments to EBIT to get higher NOPAT figures so they are more comparable to the projected figures.
@@financialmodeling Thanks so much, very useful
Great video! can you please update link download?
The links still work. Click "Show More" to see them.
THere are interest and tax related items in my company’s working capital changes on their CFS, though?
What do i do
Ignore any interest-related items. Tax items should not be within the Change in WC, but if they are, you can factor them in if they seem to be recurring.
please what or where is the link to get the files?
Click "more" at the top near the description and scroll to the links.
Are dividends received by a company added to UFCF?
No. They are considered a financing activity related to the company's capital structure.
I am sorry, but your Marketing is bad. What do your offer and what is the price? I think I would pay 30 - 50€, but not more.
I would recommend taking a course on Udemy if you're looking for something in that price range. We offer highly specialized courses that are relevant for people looking to get into the most competitive, highest-paying jobs (e.g., investment banking and private equity). Everything is laid out pretty clearly on our Courses page (breakingintowallstreet.com/biws/breaking-into-wall-street-courses/). Jobs such as IB and PE often pay $150K to $300K for entry-level roles, so there is considerable willingness to pay more than 30 - 50€ to gain an advantage. As far as our marketing being bad: well, we now have 40,000 customers, major corporations like Wells Fargo use our training for analysts, and we've grown 10x since launching in 2009... so we must be doing something right. If it's not for you, that's fine - not everyone likes our approach, some people don't like us, some people think it's too expensive, etc. If that's you, you can still look at our free content and then sign up for a book or non-specialized course on a site like Udemy to learn more.
Get rekt
Wow. You just got pwned.