Free Cash Flow · 2026-07-07

How to Calculate Free Cash Flow From EBITDA (With Formula)

The formula to get from EBITDA to free cash flow — tax, CAPEX and working-capital adjustments — and the common shortcuts that overstate cash.

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.

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

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.

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