Free Cash Flow to Equity (FCFE) Calculator
Compute Free Cash Flow to Equity (FCFE) from Net Income or from FCFF, see every step of the calculation, and quickly compare levered vs. unlevered scenarios.
What is Free Cash Flow to Equity (FCFE)?
Free Cash Flow to Equity (FCFE) measures the cash flow available to common shareholders after operating expenses, taxes, reinvestment needs, and net debt transactions (new borrowing minus principal repayments). It represents the cash that could, in theory, be paid out as dividends without impairing the firm’s operations.
Standard FCFE formula from Net Income:
\( \text{FCFE} = \text{Net Income} + \text{Depreciation \& Amortization} - \text{Capex} - \Delta \text{Working Capital} + \text{Net Borrowing} \)
FCFE from FCFF (Free Cash Flow to the Firm):
\( \text{FCFE} = \text{FCFF} - \text{Interest} \times (1 - \text{Tax Rate}) + \text{Net Borrowing} \)
FCFE vs FCFF: what’s the difference?
- FCFF (Free Cash Flow to the Firm) is the cash flow available to all capital providers (debt and equity) before interest payments.
- FCFE is the portion of cash flow available only to equity holders after accounting for interest, principal repayments, and new borrowing.
In valuation:
- Discount FCFF at the WACC to get firm value, then subtract net debt to get equity value.
- Discount FCFE at the cost of equity to get equity value directly.
How to calculate FCFE step by step
1. From Net Income
- Start with Net Income (after interest and taxes).
- Add back Depreciation & Amortization (non‑cash charges).
- Subtract Capital Expenditures (Capex) – cash spent on long‑term assets.
-
Subtract increase in Working Capital (or add
decrease):
\( \Delta WC = WC_{\text{current}} - WC_{\text{previous}} \). If ΔWC > 0, cash is tied up and FCFE decreases. - Add Net Borrowing (new debt − principal repaid).
2. From FCFF
- Start with FCFF (cash flow available to both debt and equity).
- Subtract after‑tax interest: \( \text{Interest} \times (1 - \text{Tax Rate}) \).
- Add Net Borrowing (new debt − principal repaid).
Worked example
Suppose a company reports the following for the year:
- Net Income = 1,200,000
- Depreciation & Amortization = 300,000
- Capex = 500,000
- Increase in Working Capital = 100,000
- Net Borrowing = 200,000
Then:
\( \text{FCFE} = 1{,}200{,}000 + 300{,}000 - 500{,}000 - 100{,}000 + 200{,}000 = 1{,}100{,}000 \)
If there are 5,000,000 shares outstanding, FCFE per share is: \( 1{,}100{,}000 / 5{,}000{,}000 = 0.22 \) per share.
Common pitfalls and interpretation tips
- Sign of ΔWorking Capital: an increase in WC is a use of cash (subtract it); a decrease is a source of cash (add it).
- Net Borrowing vs. total debt: use the change in debt (new issues − repayments), not the ending balance.
- Negative FCFE: often occurs in high‑growth firms investing heavily. Check whether negative FCFE is temporary and financed by equity.
- Stability of leverage: FCFE models work best when leverage (debt ratio) is relatively stable or explicitly forecast.
Use cases for FCFE
- Equity valuation (DCF to equity): discount forecast FCFE at the cost of equity to estimate intrinsic share value.
- Dividend capacity analysis: compare FCFE to actual dividends to see if payouts are sustainable.
- Capital structure scenarios: test how changes in borrowing, capex, or working capital affect cash available to shareholders.
FAQ
Is FCFE the same as dividends?
No. FCFE is the capacity to pay dividends, not the actual dividend paid. Companies may retain part of FCFE to fund growth or strengthen the balance sheet.
Which discount rate should I use with FCFE?
Use the cost of equity, typically estimated via CAPM or other models. WACC is used with FCFF, not FCFE.
Can I use FCFE for banks and financial institutions?
For banks and insurers, defining capex and working capital is tricky. Analysts often prefer dividend discount models or excess return models instead of FCFE for financials.