EBITDA to FCF: How to Calculate Free Cash Flow (Formula)

Key takeaway

Get from EBITDA to FCF in three adjustments: cash tax, CAPEX and the working-capital movement. Includes the FCFF formula and a worked example.

To calculate free cash flow from EBITDA, subtract cash taxes, capital expenditure and the increase in working capital: EBITDA − cash tax − CAPEX − ΔWorking capital ≈ unlevered free cash flow. EBITDA is a useful starting point because it approximates cash operating profit, but it is not cash — it ignores the tax you pay, the assets you must replace, and the cash tied up as the business grows. Bridging those three gaps is what turns EBITDA into real free cash flow.

Start from EBITDA, then remove tax

EBITDA excludes tax, so the first adjustment is to deduct the cash taxes actually paid on operating profit. The precise route is to compute NOPAT — operating profit (EBIT, after depreciation) taxed at your rate — rather than taxing EBITDA directly, because depreciation is tax-deductible. Using EBITDA untaxed is a common shortcut that overstates cash.

Subtract capital expenditure

EBITDA adds back depreciation, but assets genuinely wear out and must be replaced. Free cash flow charges the actual cash spent on CAPEX in the period it is spent, not the accounting depreciation. For capital-intensive businesses this gap is large, which is why EBITDA flatters them and free cash flow does not.

Adjust for working capital

As a business grows, it ties up more cash in receivables and inventory before it collects — an increase in working capital consumes cash even though it never appears in EBITDA. Subtract the period increase (or add a decrease). This adjustment, driven by receivable, inventory and payable days, is the one most often forgotten.

Why the shortcuts matter

EBITDA minus CAPEX is a rough proxy for free cash flow, but skipping tax and working capital can overstate cash by a wide margin — especially for growing or capital-heavy companies. Anyone valuing or lending against a business will insist on the full bridge.

A worked example

Take a business with $5m of EBITDA. Deduct $1m of cash tax (on operating profit after depreciation), $1.5m of CAPEX, and a $0.5m increase in working capital as the business grows. Free cash flow is $5m − $1m − $1.5m − $0.5m = $2m — a conversion of just 40% of EBITDA into cash. A quick 'EBITDA minus CAPEX' shortcut would have shown $3.5m, overstating cash by 75%. That gap is the tax and working capital the shortcut ignores, and it is exactly the gap that matters to a lender or a buyer.

$5m of EBITDA converts to just $2m of free cash flow — a 40% conversion rate.

Watch the working-capital swing

Working capital is the least predictable line in the bridge. In a fast-growth year it can consume a large slice of EBITDA; in a year of shrinking sales it can release cash. This is why a single year's free cash flow can mislead, and why a multi-period forecast driven by receivable, inventory and payable days gives a far truer picture of cash generation.

Get the full bridge automatically

Worked example: EBITDA to free cash flow

Start with $10m of EBITDA. Subtract cash taxes of $2m, an increase in working capital of $0.5m, and CAPEX of $2.5m. Unlevered free cash flow = 10 − 2 − 0.5 − 2.5 = $5m. To reach levered free cash flow, subtract after-tax interest of $0.8m and net debt repayment of $1.2m, leaving $3m of cash available to equity.

The biggest swing factor is CAPEX: a business reinvesting heavily to grow can convert a large EBITDA into modest free cash flow, which is exactly why acquirers underwrite FCF, not EBITDA alone.

Maintenance vs growth CAPEX

Only maintenance CAPEX is strictly needed to sustain current cash flows; growth CAPEX funds expansion. Separating them reveals the free cash flow the business would produce if it stopped growing — a useful floor for valuation.

The EasyFinancialModels Free Cash Flow Forecasting tool runs the precise calculation — NOPAT plus depreciation, minus CAPEX, minus the working-capital increase — and reports free cash flow alongside EBITDA so you can read the conversion directly. It's free for 3 years and downloads as an editable, formula-linked Excel model.

The EBITDA to FCF bridge, visualised

The walk from EBITDA to free cash flow is a subtraction exercise, and seeing it as a bridge makes the logic stick. Start at EBITDA, take out the three cash items the metric ignores — taxes actually paid, the movement in working capital, and capital expenditure — and what lands on the other side is unlevered free cash flow.

Values in $M. The same walk as the worked example: $10M of EBITDA becomes $5M of unlevered free cash flow.

Finishing the walk: UFCF to LFCF

To complete the bridge to levered free cash flow, subtract debt service — after-tax interest and scheduled principal. In the example, $0.8M of interest and $1.2M of principal leave $3.0M of LFCF, the cash genuinely available to equity holders. Lenders stop reading at UFCF; shareholders should not.

EBIT to FCF: the variant that starts one line lower

Some analysts start the bridge at EBIT instead of EBITDA. That walk runs: EBIT × (1 − tax rate) = NOPAT, add back depreciation and amortisation, then subtract CAPEX and the working-capital increase. It reaches exactly the same UFCF — EBIT already deducts D&A, so the add-back restores it before the real cash costs come out. Start from EBIT when tax and depreciation are the focus; start from EBITDA when you are reconciling against valuation multiples.

Frequently asked questions

How do you get from EBITDA to free cash flow?

Start with EBITDA, subtract cash taxes, subtract the increase in working capital and subtract CAPEX. The result is unlevered free cash flow; subtract interest and debt repayment for levered FCF.

Why isn't EBITDA the same as free cash flow?

EBITDA ignores taxes paid, reinvestment (CAPEX) and working-capital changes — all real cash items. A high-EBITDA business with heavy CAPEX can still generate little free cash flow.

Do you add back depreciation?

EBITDA already excludes depreciation, so you don't add it again. You instead subtract actual CAPEX, the real cash cost of maintaining and growing the asset base.

What is the EBITDA to FCF bridge?

The bridge — also called the walk — is the sequence of adjustments connecting EBITDA to free cash flow: subtract cash taxes, the increase in working capital and CAPEX to reach unlevered FCF, then subtract interest and principal for levered FCF. Presenting it as a waterfall makes each cash leak visible.

How do you go from EBIT to FCF?

Multiply EBIT by (1 − tax rate) to get NOPAT, add back depreciation and amortisation, then subtract CAPEX and any increase in working capital. That gives unlevered free cash flow — identical to the EBITDA route, just starting one line lower.

→ Build your free cash flow model free with the Free Cash Flow tool

More Free Cash Flow guides

What Is Free Cash Flow? UFCF vs LFCF Explained Simply · Unlevered vs Levered Free Cash Flow: The Difference and When to Use Each · Why Free Cash Flow Matters More Than Profit · Free Cash Flow Conversion: What It Is and What's a Good Rate · How to Model Tax-Loss Carryforwards (NOLs) in a Financial Model

About the author

Every model is built and reviewed by the project's Financial Advisor — a Fellow Chartered Accountant (FCA) of the Institute of Chartered Accountants of Pakistan (ICAP), Chartered Global Management Accountant (CGMA) and Associate Chartered Management Accountant (ACMA) with around two decades of corporate finance, audit and accounting experience, designing investor-grade financial models across industries. Full credentials and background are available on LinkedIn. More about the author →

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