Free Cash Flow
The free cash flow (FCF) is the cash flow actually available for distribution to all investors, including creditors and stockholders, after an organization has made all investments in fixed assets and working capital necessary to sustain ongoing operations. (Brigham & Ehrnhardt, 2014, p. 11).
Free Cash Flow = Net Operating Profit After Taxes (NOPAT) - Net Investment in Operating Capital
Equation 1. Free Cash Flow
“Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it 's tough to develop new products, make acquisitions, pay dividends and reduce debt. Some believe that Wall Street focuses myopically on earnings while ignoring the "real" cash that a firm generates. Earnings can often be clouded by accounting gimmicks, but it 's tougher to fake cash flow. For this reason, some investors believe that FCF gives a much clearer view of the ability to generate cash (and thus profits). It is important to note that negative free cash flow is not bad in itself. If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.” (Investopedia, 2015).
Tesla 's Free Cash Flow Income Statement
USD in Thousands 12/31/14 Revenue 3,198,356
Interest Income 2,939
Earnings Before Interest and Taxes -186,700 Operating Income 3,201,295
x ( 1 - Tax Rate) 0.40 Cost & Expenses 2,316,685
Net Operating Profit After Taxes (NOPAT) -112,020 Other Expense 1,071,310
Total Operating Cost 3,387,995
Operating Current Assets 3,198,657 Earnings Before Interest and Taxes -186,700
(-) Operating Curren...
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...ded of -$510,270 thousand.
Economic Value Added (EVA)/Economic Profit (EP)
Net Operating Capital $3,687,502
After Tax Cost of Capital (WACC%) 10.80%
EVP = NOPAT - ( Net Operating Capital * WACC)
EVA or EP -$510,270
Table 3. Economic Value Added Calculation
While this figure may be alarming the shareholders, it does not seem have had a significant affect of Tesla, an organization who is still in the growing stages and due to the higher invested capital base, because they are heavily investing their assets for future growth.
Weighted Average Cost of Capital
Weighted Average Cost of Capital is the weighted average of the after tax component costs of capital – debt, preferred stock, and common equity. Each weighting factor is the proportion of that type of capital in the optimal, or target capital structure. (Brigham & Ehrnhardt, 2014, p. 359).
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