Free cash flow to firm

Free cash flow to the firm is the cash a business generates after taxes and reinvestment but before paying interest to lenders or dividends to shareholders. It represents the total claim on operating cash flow available to all capital providers — both debt and equity holders. Because it sits above the capital-structure line, FCFF is the right cash flow to discount in an enterprise-value DCF, paired with the weighted average cost of capital (WACC). The mechanical computation is EBIT times one-minus-tax-rate (NOPAT), plus depreciation and amortization, minus capital expenditures, minus the increase in working capital. The output is unlevered: it does not change if the company's debt-to-equity mix changes, which is the property that makes it useful for comparing firms with different capital structures or for stress-testing balance-sheet scenarios. The trade-off is that FCFF requires careful tax-rate normalization (statutory versus effective), accurate maintenance-capex separation, and a defensible WACC. For asset-light businesses with negligible debt, the EPS-based equity-value approach (discount earnings or owner-earnings at cost of equity) gives a similar answer with fewer moving parts; for capital-intensive industrials and any business with non-trivial debt, FCFF is the cleaner framework.