What is Free Cash Flow to Equity (FCFE) and Why Should You Care?
FCFE is a financial metric that measures a company's ability to generate cash available for distribution to equity shareholders. After handling all capital expenses and debt repayments, FCFE shows what remains for investors.
A positive and consistently high FCFE suggests a financially healthy, well-managed company. It indicates the company has covered its operational and capital costs and has extra cash for shareholders. Negative FCFE could signal financial troubles or the need for external financing.
The Formula
$$\text{FCFE} = \text{CFO} - \text{CapEx} + \text{Net Debt}$$
Where:
- Cash Flow from Operations is net cash generated from core business operations
- Capital Expenditures are funds used to acquire, upgrade, and maintain physical assets
- Net Debt Issued is new debt issued minus debt repaid
Calculation Example
Consider Company XYZ with:
- Cash Flow from Operations: $500,000
- Capital Expenditures: $200,000
- Net Debt Issued: $100,000
$$\text{FCFE} = 500000 - 200000 + 100000 = 400000$$
Company XYZ has FCFE of $400,000, which could be distributed to shareholders.
| Parameter | Value |
|---|---|
| Cash Flow from Operations | $500,000 |
| Capital Expenditures | $200,000 |
| Net Debt Issued | $100,000 |
| FCFE | $400,000 |
Quick Tips
- Strong FCFE signals good financial health
- Negative FCFE is a red flag suggesting the company may need external financing
- Investors favor companies with consistent positive FCFE, as it often translates to potential dividends and share buybacks