Computing Free Cash Flow to Equity from Free Cash Flow to the Firm
Free cash flow to equity (FCFE) represents the cash flow a company generates after necessary expenses and expenditures and after satisfying the claims of debtholders. It can be calculated from Free cash flow to the firm (FCFF) as follows:
FCFE = FCFF – After-tax interest expense + Net borrowing.
If the company borrows more in a year than it repays it will have additional funds that could be distributed to shareholders, which is why net borrowing is added to FCFF in order to determine FCFE. Obviously, though, investors would want to consider whether continued borrowing to pay dividends is a sustainable practice.
For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis, Investing in Stocks See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
