Associate didn&#039;t know how to get to free cash flows in Super Day?

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Analyst 2 in IB-M&A

1mo

You're the one in the wrong here...lot more common to start with EBITDA on the job

vialapaz

1mo

I see. In that case, I'm genuinely curious as to why most of the guides say to use EBIT. Just trying to learn to be honest. I'm recruiting right now, so it would be helpful to know.

In practice it's EBITDA, but the guides say EBIT? Am I right?

Associate 1 in PE - LBOs

1mo

Most Helpful

D&A is non-cash. So why would you want to include it in your FCF calc? Don't think it's anymore complicated that. I usually think simpler is better in terms of interview technical questions and let the interviewer probe deeper if they want to. I don't remember what the guides say or don't say. But I think it's just as simple as the following:

Unlevered FCF: EBITDA - capex +/- change in net working capital - cash taxes

Levered FCF: EBITDA - capex +/- change in net working capital - cash taxes - cash interest expense - amortization

Edit: For clarification, by amortization I mean amort payments related to debt just so you aren't confusing that with amortization associated with intangibles, etc. in D&A

Edit2: If you really wanted to get simple with it, a lot of banks will frame up the FCF and FCF conversion just as EBITDA less capex in CIMs, although that's more marketing than actual substance

Authored by: Certified Private Equity Professional - 1st Year AssociateCertified Private Equity Pro

vialapaz

1mo

This actually clarifies it. Thank you.

My exact approach for the interview was: NI - COGS - Operating Expenses = EBIT => EBIT x (1- Tax Rate) => Operating Profit after-tax => + Non-cash expenses (D&A) - CapEx - NWC = FCF

But I guess you can simplify things by simply going with: EBITDA - capex - NWC - tax (unlevered). Right?

I think the interviewer might have not heard me when I said "add back non-cash expenses," so it might have been a misunderstanding.

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Associate 1 in PE - LBOs

1mo

It does sound like he might have jumped the gun on you before letting you go through all of your thinking, but the calc starting from EBITDA is just how most people think about it and practically model a lot of things so he might have just heard EBIT and stopped you right away

Authored by: Certified Private Equity Professional - 1st Year AssociateCertified Private Equity Pro

1 reply

Analyst 2 in IB - Cov

1mo

Funniest

My exact approach for the interview was: NI - COGS - Operating Expenses = EBIT => EBIT x (1- Tax Rate) => Operating Profit after-tax => + Non-cash expenses (D&A) - CapEx - NWC = FCF

My brother in christ... in what world is Net Income minus COGS minus Opex equal to EBIT...

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1 reply

nthmlafn

1mo

Since when is amort of financing fees a cash payment? Or you mean principal payments?

1 reply

The Darkling

1mo

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