Calculating the Free Cash Flow (FCF)

Question

I'm working on fundamental analysis on a public company, and am trying to calculate the Free Cash Flow for Facebook (FB) for the latest quarter - ending Sep 30, 2015, as shown below and would like to confirm I am not making any critical errors:

FCF = EBIT * (1 - tax rate) + (depreciation and amortization) - (changes in working capital) - (capital expenditures)

which is equivalent to:

FCF = EBIT * (1 - (income tax expense / EBIT)) + (depreciation + accumulated amortization) - (total assets - total liabilities) - (capital expenditures)

FCF = 1,432,000 * (1 - (536,000 / 1,432,000)) + (1,243,000 + 0) - (40,184,000 - 4,088,000) - (-1,831,000)

FCF = -32,125,568

Questions to answer

• Is the FCF being calculated correctly?
• If not, please explain what is incorrect and please walk through the steps to calculate the correct FCF for Facebook for the latest quarter, using the data provided by Yahoo Finance and explain how you got to the final number
• What is indicated by a company with a negative FCF value?

Thanks in advance

I am getting the financial data from Yahoo Finance:

Income Statement Used: http://finance.yahoo.com/q/is?s=FB+Income+Statement&quarterly

Balance Sheet Used: http://finance.yahoo.com/q/bs?s=FB+Balance+Sheet&quarterly

Cash Flow Used: http://finance.yahoo.com/q/cf?s=FB+Cash+Flow&quarterly

Answer 1

First, don't use Yahoo's mangling of the XBRL data to do financial analysis. Get it from the horse's mouth:

http://www.sec.gov/edgar/searchedgar/companysearch.html

Search for Facebook, select the latest 10-Q, and look at the income statement on pg. 6 (helpfully linked in the table of contents). This is what humans do.

When you do this, you see that Yahoo omitted FB's (admittedly trivial) interest expense. I've seen much worse errors.

If you're trying to scrape Yahoo... well do what you must. You'll do better getting the XBRL data straight from EDGAR and mangling it yourself, but there's a learning curve, and if you're trying to compare lots of companies there's a problem of mapping everybody to a common chart of accounts.

Second, assuming you're not using FCF as a valuation metric (which has got some problems)... you don't want to exclude interest expense from the calculation of free cash flow. This becomes significant for heavily indebted firms.

You might as well just start from net income and adjust from there... which, as it happens, is exactly the approach taken by the normal "indirect" form of the statement of cash flows. That's what this statement is for. Essentially you want to take cash flow from operations and subtract capital expenditures (from the cash flow from investments section). It's not an encouraging sign that Yahoo's lines on the cash flow statement don't sum to the totals.

As far as definitions go... working capital is not assets - liabilities, it is current assets - current liabilities. Furthermore, you want to calculate changes in working capital, i.e. the difference in net current assets from the previous quarter. What you're doing here is subtracting the company's accumulated equity capital from a single quarter's operating results, which is why you're getting an insane result that in no way resembles what appears in the statement of cash flows. Also you seem to be using the numbers for the wrong quarter - 2014q4 instead of 2015q3.

I can't figure out where you're getting your depreciation number from, but the statement of cash flows shows they booked $486M in depreciation for 2015q3; your number is high.

FB doesn't have negative FCF.