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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

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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.

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    Your post is better suited as a comment as it does not answer the question by focusing on the Free Cash Flow calculation. The goal is to understand how to calculate the Free Cash Flow using the sources provided. The depreciation figure is the first line item on the Cash Flow statement in the links provided. If my calculations are wrong, please point out why they are wrong and how to correctly calculate the FCF using the links provided, to make your post more useful. You say FB doesn't have a negative FCF but don't provide any reasoning, my numbers are pulled from Q4 of 2015 not Q3 of 2014 – AnchovyLegend Jan 12 '16 at 20:30
  • Sorry, let me unbury the answer: ""Essentially you want to take cash flow from operations and subtract capital expenditures (from the cash flow from investments section)""" So from your link, for 2015q3: $2192 - $780. This should be a good figure for FCF. The major error in your calculation: """ 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.""" – Tyrone Slothrop Jan 13 '16 at 3:19
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    So from your link, for 2015q3: current assets - current liabilities = 19139000 - 1792000. For 2015q2: current assets - current liabilities = 16951000 - 1881000. Change in working capital over 2015q3 (19139000 - 1792000) - (16951000 - 1881000). Hope that helps – Tyrone Slothrop Jan 13 '16 at 3:30
  • Thanks for trying to clarify, although your calculation for FCF is not correct. You're totally ignoring the FCF formula in the post, which is found here: en.wikipedia.org/wiki/Free_cash_flow and coming up with your own instead – AnchovyLegend Jan 13 '16 at 12:25
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    In my professional opinion (as a CFA charterholder who does this for a living and uses FCF calculations on a daily basis) you'd be better off here calculating from the statement of cash flows, not the income stmt + balance sheet. The calculation you're using is OK though (the complaint about excluded interest income is minor, especially for FB). The comment above with the math corrects your major error in the formula you've chosen (i.e. you use assets - liabilities instead of changes in working capital). Good luck! – Tyrone Slothrop Jan 13 '16 at 12:39

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