Free Cash Flow to Equity (FCFE)
Free Cash Flow to Equity (FCFE)
Cash available to shareholders after operating needs, capital spending and net debt flows: operating cash flow less capital expenditures plus net borrowing. What the company could pay out without changing its financial position.
When to use: Use as the cash flow in an equity DCF (discount at the cost of equity), and as a reality check on dividends and buybacks: distributions above FCFE are funded by borrowing or by running down cash.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| FCFE | FCFE | Free cash flow to equity | $ |
| CFO | Cash Flow from Operations | Net cash from operating activities | $ |
| CapEx | Capital Expenditures | Cash spent on property, plant and equipment | $ |
| NetBorrowing | Net Borrowing | New debt raised less debt repaid; negative when repaying | $ |
Real-Life Examples
Example 1: Growing with Modest Leverage
CFO $500M, capex $150M, net borrowing $50M.
Given
Step-by-Step
$400M could be paid to shareholders this year without weakening the balance sheet. New borrowing added $50M to what operations alone produced.
Example 2: Paying Down Debt
CFO $220M, capex $180M, net borrowing −$40M (repayments exceed new debt).
Given
Step-by-Step
Nothing is left for shareholders: capital spending and debt repayment absorb all the operating cash. Any dividend here would be funded from cash on hand.
Frequently Asked Questions
Plain free cash flow (CFO minus capex) belongs to all capital providers. FCFE adds net borrowing, so it is the slice left for equity holders after lenders have been paid or have lent more.
The cost of equity, because FCFE is a flow to equity holders only. FCFF is discounted at WACC.