THE FCFE DISCOUNT MODEL

The amount of cash a business generates that is available to be potentially distributed to shareholders
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What is Free Cash Flow to Equity (FCFE)?

Free cash flow to equity (FCFE) is the amount of cash a business generates that is available to be potentially distributed to shareholdersStockholders EquityStockholders Equity (also known as Shareholders Equity) is an account on a company"s balance sheet that consists of share capital plus. It is calculated as Cash from Operations less Capital ExpendituresCapital ExpenditureA capital expenditure (“CapEx” for short) is the payment with either cash or credit to purchase long term physical or fixed assets used in a plus net debt issued. This guide will provide a detailed explanation of why it’s important and how to calculate it, along with several examples.

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FCFE Formula

Let’s look at how to calculate Free Cash Flow to Equity (FCFE) by examining the formula. It can easily be derived from a company’s Statement of Cash FlowsStatement of Cash FlowsThe Statement of Cash Flows (also referred to as the cash flow statement) is one of the three key financial statements that report the cash.

Formula:

FCFE = Cash from Operating Activities – Capital Expenditures + Net Debt Issued (Repaid)

FCFE Example

Below is a screenshot of Amazon’s 2016 annual report and statement of cash flows, which can be used to calculate free cash flow to equity for years 2014 – 2016.

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As you can see in the image above, the calculation for each year is as follows:

2014: 6,842 – 4,893 + 6,359 – 513 = 7,7952015: 11,920 – 4,589 + 353 – 1,652 = 6,0322016: 16,443 – 6,737 + 621 – 354 = 9,973

Free Cash Flow to Equity Analysis

Let’s look at an Excel spreadsheet a financial analyst would use to perform an FCFE analysis for a company.

As you can see in the figures below, the company has a clearly laid out Statement of Cash Flows, which includes three sections: Operations, Investments, and Financing.

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In 2018, the company reported cash from operations of $23,350 million, spent $500 million on purchasing property, plant, and equipment (PP&E)PP&E (Property, Plant and Equipment)PP&E (Property, Plant, and Equipment) is one of the core non-current assets found on the balance sheet. PP&E is impacted by Capex,and issued no new debt, which results in an FCFE of $22,850 million.

In 2014, the numbers tell a very different story, the company reported cash from operations of -$5,490 million, spent $40,400 million on purchasing property, plant, and equipment (PP&E) and issued $18,500 million of debt, which results in an FCFE of -$27,390 million.

As you can see, in one year the company posted very positive FCFE and in another year, it was very negative, even though operating activities weren’t as dissimilar. The reason for this was the significant investment that was made in purchasing additional PP&E.

Since equity investors must fund the purchase of such assets, the Free Cash Flow to Equity figure must account for this.

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FCFE vs FCFF

FCFF stands for Free Cash Flow to the Firm and represents the cash flow that’s available to all investors in the business (both debt and equity).

The only real difference between the two is interest expense and their impact on taxes. Assuming a company has some debt, its FCFF will be higher than FCFE by the after-tax cost of debt amount.

To learn more about FCFF and how to calculate it, read CFI’s Ultimate Cash Flow GuideThe Ultimate Cash Flow Guide (EBITDA, CF, FCF, FCFE, FCFF)This is the ultimate Cash Flow Guide to understand the differences between EBITDA, Cash Flow from Operations (CF), Free Cash Flow (FCF), Unlevered Free Cash Flow or Free Cash Flow to Firm (FCFF). Learn the formula to calculate each and derive them from an income statement, balance sheet or statement of cash flows.

Usage in Valuation

When valuing a company, it’s important to distinguish between the Enterprise ValueEnterprise Value (EV)Enterprise Value, or Firm Value, is the entire value of a firm equal to its equity value, plus net debt, plus any minority interest, used in and Equity ValueEquity ValueEquity value can be defined as the total value of the company that is attributable to shareholders. To calculate equity value follow this guide from CFI.. The Enterprise Value is the value of the entire business without taking its capital structure into account. Equity Value is the value attributable to shareholders, which includes any excess cash and exclude all debt and financial obligations.

The type of value you’re trying to arrive at will determine which cash flow metric you should use.

Use FCFE to calculate the net present value (NPV) of equity.

Use FCFF to calculate the net present value (NPV) of the enterprise.

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As you can see in the image above from CFI’s LBO Financial Modeling Course, an analyst can build a schedule for both Firm-wide and Equity-only cash flows.

How to Calculate FCFE from …

Here are a couple of ways you can arrive at FCFE Formula from different Income StatementIncome StatementThe Income Statement is one of a company"s core financial statements that shows their profit and loss over a period of time.The profit or Items:

How to calculate FCFE from Net IncomeHow to Calculate FCFE from Net IncomeThe Free Cash Flow to Equity (FCFE) can be calculated from Net Income. It is the amount of cash generated by a company that can be

How to calculate FCFE from EBITHow to Calculate FCFE from EBIT?Calculate FCFE from EBIT : Free Cash Flow to Equity (FCFE) is the amount of cash generated by a company that can be potentially distributed to its shareholders. Using the FCFE, an analyst can determine the Net Present Value (NPV) of a company’s equity, which can be subsequently used to calculate the theoretical share price of the company.

How to calculate FCFE from CFOHow to Calculate FCFE from CFO?How to calculate FCFE from CFO? Free Cash Flow to Equity (FCFE) is the amount of cash generated by a company that can be potentially

How to calculate FCFE from EBITDAHow to Calculate FCFE from EBITDAYou can calculate FCFE from EBITDA by subtracting interest, taxes, change in net working capital, and capital expenditures – and then add

Additional Resources

Thank you for reading this guide to FCFE and why it’s an important metric in corporate finance. CFI is the official global provider of the Financial Modeling & Valuation Analyst (FMVA)TM FMVA® CertificationJoin 850,000+ students who work for companies like Amazon, J.P. Morgan, and Ferrari

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