pick one company and use the company’s most recent financial statements to compute its free cash flow.
We learn to use free cash flows (FCF) to evaluate a firm. It is important to know how free cash flow is defined. In this assignment, pick one company and use the company’s most recent financial statements to compute its free cash flow. Free cash flow is defined as following.
FCF = Operating cash flow – Investment in working capital – Investment in fixed assets
Operating cash flow = EBIT + Depreciation – Tax
Investment in working capital = NWC this year – NWC last year = (CA – CL) this year – (CA – CL) last year
Investment in fixed assets = Net fixed assets this year – Net fixed assets last year + Depreciation
Free Cash Flow for Microsoft in 2021 (An Example)
I like to compute the Free Cash Flow (FCF) for Microsoft in 2021. I first collect the following information from its latest financial statements on yahoo finance (in millions).
EBIT: $69,916 (Income Statement)
Tax: $9,831 (Income Statement)
Depreciation: $11,686 (Cash Flow Statement)
Current Assets (CA) in 2021: $184,406 (Balance Sheet)
Current Liabilities (CL) in 2021: $88,657 (Balance Sheet)
Current Assets (CA) in 2020: $181,915 (Balance Sheet)
Current Liabilities (CL) in 2020: $72,310 (Balance Sheet)
Fixed Assets in 2021 = $149,373 (Balance Sheet)
Fixed Assets in 2020 = $119,396 (Balance Sheet)
Then, I can start computing the FCF as the following.
Operating Cash Flow (OCF) = EBIT – Tax + Depreciation = 69,916 – 9,831 + 11,686 = 71,771
Change in Net Working Capital (NWC): (CA-CL) in 2021 – (CA-CL) in 2020 = (184,406 – 88,657) – (181,915 – 72,310) = 95,749 – 109,605 = -13,856
Capital Investment = Fixed assets in 2021 – Fixed assets in 2020 + Depreciation = 149,373 – 119,396 + 11,686 = 41,663
FCF in 2021 = OCF – Change in NWC – Capital Investment = 71,771– (-13,856) – 41,663 = $43,964 million
We can conclude that in 2021 Microsoft generated the “free” cash amount of $43,964 million for its investors, including bondholders and shareholders.
