How do you get from EBIT to unlevered free cash flow?
Whether you know why interest is excluded and how each adjustment works.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
Tax EBIT at the marginal tax rate to get NOPAT — the operating profit after tax as if the company had no debt. Add back depreciation, amortisation and other non-cash charges; subtract capex and the increase in net working capital. Interest is left out because those cash flows belong to all capital providers, and the WACC already reflects the cost of debt and its tax benefit.
The full answer
Example (€m)
| Line | Value |
|---|---|
| EBIT | 400 |
| Tax at 25% | −100 |
| NOPAT | 300 |
| + D&A | 80 |
| − Capex | −120 |
| − Increase in net working capital | −30 |
| Unlevered free cash flow | 230 |
Why tax EBIT, not reported tax
Reported tax is lower because interest is deductible. That tax shield is captured once, in the after-tax cost of debt in the WACC; using reported tax would count it twice.
Other items
- Stock-based compensation: many practitioners treat it as a real cost (don't add it back).
- Leases under IFRS 16: be consistent between cash flows and the debt in the bridge.
Mistakes to avoid
Starting from net income, or subtracting interest.
Follow-ups they may ask
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