The five flavors: (1) FCFF — free cash flow to the firm; the right input for an enterprise-value DCF. (2) FCFE — free cash flow to equity; the right input for an equity DCF. (3) OCF − CapEx — the practitioner's quick screen; conservative when SBC is small, optimistic when SBC is large. (4) EBITDA − CapEx — useful for comparing operational cash quality across companies with different capital structures. (5) Owner Earnings — Buffett's lens; subtracts SBC and uses maintenance capex only. Owner Earnings is the most conservative; FCFF is the most enterprise-comparable.
| Flavor | Formula | Best for |
|---|---|---|
| FCFF | EBIT × (1 − tax) + D&A − ΔWC − CapEx | Enterprise-level DCF when capital structure may change |
| FCFE | Net income + D&A − ΔWC − CapEx + Net Borrowing | Equity DCF for stable-leverage companies |
| OCF − CapEx | Operating cash flow − total capex | Quick screen; comparable across most reported statements |
| EBITDA − CapEx | EBITDA − CapEx | Operational cash quality across mixed capital structures |
| Owner Earnings | Net income + D&A − maintenance CapEx − SBC + non-cash adjustments | Long-horizon investor lens; most conservative |
Worked example — Vanmark Communications reports OCF $1.2B, CapEx $700M, SBC $250M. OCF − CapEx is $500M. But: SBC ran 6% of revenue, and management discloses that ~$200M of capex is growth (new tower buildout) while $500M is maintenance (existing-network sustaining). Owner Earnings = OCF $1.2B − maintenance capex $500M − SBC $250M = $450M. The headline screen ($500M) is 11% above the conservative shareholder lens ($450M) — a small gap here, but at heavy-SBC software names the gap regularly hits 40%+. Always disclose which definition you used.
Going Deeper — when the flavors disagree, the disagreement is the signal. If Owner Earnings is meaningfully below OCF − CapEx for several years running, the gap is almost always either heavy stock-based comp (read: equity dilution funding the income statement) or aggressive capex classification (growth capex labeled as maintenance to flatter the screen). Either way, the headline number is hiding a real cost. AI prompt: "For this ticker, compute OCF − CapEx and a conservative Owner Earnings figure across the past five years. Show me the year with the largest gap and explain whether stock-based comp, capex classification, or working-capital tactics drove the divergence."
Sit with the ideas.
Tirebridge Materials reports operating cash flow of $400M, capex of $250M, and stock-based compensation of $80M. Two analysts compute free cash flow differently — one says $150M, the other says ~$70M. Which framing best explains why both can be defensible at the same time?