How do you get from Revenue to FCF?
Answer
Use a similar tone as above:
Subtract COGS and Operating Expenses (G&A, S&M, R&D) and Depreciation & Amortization (D&A) from Revenue to get to Operating Income (EBIT)
Since we’re talking about Unlevered Free Cash Flow, we’ll multiply EBIT by 1 - tax rate to get to EBIAT (Earnings Before Interest After Tax)
It’s worth confirming that they want Unlevered FCF. If they ask how levered would be different, all you would do to calculate levered FCF is solve for Net Income instead of EBIAT by subtracting interest
Once we have EBIAT, we’ll add back Depreciation and any other non-cash changes and subtract both CapEx and the change in Working Capital to calculate Unlevered Free Cash Flow
Why this matters to bankers
FCF is the key driver of valuation in a DCF. You must have a complete understanding of how changes to any line item affects FCF and therefore affects valuation. You will have a hard time modeling with certainty or speed otherwise.