How would you get to FCF from Cash Flow from Operations?

Let’s break down the usual FCF formula that starts at Net Income first:

FCF = Net Income + D&A - CapEx - Change in NWC

Starting with D&A, there would be no need to add it back to Cash Flow From Operations since it is a non-cash Expense.

For CapEx, these are pertaining to long-term assets, so they would fall under Cash Flow from Investing Activities. So we would need to still subtract that from Cash Flow From Operations.

NWC pertains to Current Assets & Liabilities, so they would be captured under Cash Flow from Operations.

That leaves us with:

FCF = Cash Flow From Operations - CapEx

^ This is “Levered FCF” since we’re still burdened by Interest Expense. Remember that Net Income is the first line of Cash Flow from Operations. Let’s think about our walk from EBITDA to Net Income again.

EBITDA - D&A = EBIT - Interest Expense = EBT - Taxes = Net Income

Now, if we’re solving for Unlevered FCF, we need to do something about this Interest Expense. What we’ll want to do is add back a tax-adjusted version of Interest. So, we’ll multiply Interest Expense * (1 - t) and add that back. We’ll do the same thing for any Interest Income as well. The reason we do this is since we won’t be subtracting Interest, our taxable income would increase by the amount of Interest.

Now, our formula looks like this:

FCF = Cash Flow From Operations + Tax-Adjusted Interest Expense - Tax-Adjusted Interest Income - CapEx