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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:
  • Free Cash Flow
  • Computing Free Cash Flow to the Firm from the Statement of Cash Flows
  • Constant Growth Free Cash Flow to the Firm Valuation Model
  • Computing Free Cash Flow to the Firm from Net Income
  • Free Cash Flow as Cash Flow
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    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)

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