# Calculate Free Cash Flow to Equity (FCFE) for Better Investment Insights

![Free Cash Flow to Equity](https://www.investopedia.com/thmb/WexHdNcROAOudMO--rmNB1Tw27k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/FCFE_Final-d9ef0104bab14a9a8b622a6a9a60a3bb.png)

*— Candra Huff / Investopedia*

## What Is Free Cash Flow to Equity (FCFE)?

Free cash flow to equity (FCFE) indicates the cash a company can provide to its shareholders after covering expenses, reinvestments, and debts. This metric gauges financial health, especially crucial for dividend-less firms. Investors use FCFE to determine if dividends or buybacks are sustainably funded by the company's cash flow.  

### Key Takeaways

*   Free cash flow to equity (FCFE) is the cash available to equity shareholders after all expenses, reinvestment, and debt repayments.  
    
*   FCFE is used as an alternative to the dividend discount model for evaluating a company's financial health, especially for firms that do not pay dividends.  
    
*   The FCFE formula involves subtracting capital expenditures from cash from operations and adding net debt issued.  
    
*   Analysts prefer dividends and stock buybacks funded by FCFE, indicating they are supported by the company's cash flow.  
    
*   Excess FCFE not used for dividends or buybacks can be reinvested or saved, enhancing a company's strategic financial planning.

## Components of Free Cash Flow to Equity (FCFE)

FCFE consists of net income, capital expenditures, working capital, and [debt](https://www.investopedia.com/terms/d/debt.asp). Net income is located on the company income statement. Capital expenditures can be found within the cash flows from the investing section on the cash flow statement.

Working capital, found in the operations section of the cash flow statement, is the difference between current assets and liabilities.

These are short-term capital needs for immediate operations. [Net borrowings](https://www.investopedia.com/terms/n/net-borrower.asp) appear in the financing section of the cash flow statement. Note that interest expense is included in net income and does not need to be added back.

## Formula for Free Cash Flow to Equity (FCFE)

﻿ $\text{FCFE} = \text{Cash from operations} - \text{Capex} + \text{Net debt issued}$﻿

## Using Free Cash Flow to Equity (FCFE)

Analysts often use FCFE to assess a company's value. It's popular as an alternative to the [dividend discount model (DDM)](https://www.investopedia.com/terms/d/ddm.asp), especially for companies not paying dividends. FCFE shows the cash available for shareholders, but not necessarily what's paid out.  

Analysts check if dividends and stock buybacks are funded by FCFE or other sources. Investors like it when dividends and buybacks are fully covered by FCFE.

If FCFE is lower than dividends and buyback costs, the company uses debt, existing capital, or new securities. Existing capital includes [retained earnings](https://www.investopedia.com/terms/r/retainedearnings.asp) from past periods.

Investors often dislike using debt to fund dividends, even if interest rates are low. Some analysts think borrowing for buybacks is smart if shares are cheap and rates are low, but only if share prices rise later.

If dividend payments are much lower than the FCFE, the company likely uses the extra cash to save or invest. Finally, if the funds spent to buy back shares or pay dividends are approximately equal to the FCFE, then the firm is paying it all to its investors.  

## Example of How to Use FCFE

Using the [Gordon growth model](https://www.investopedia.com/terms/g/gordongrowthmodel.asp), the FCFE is used to calculate the value of equity using this formula:

$V_\text{equity} = \frac{\text{FCFE}}{\left(r-g\right)}$

**Where:**

*   _Vequity = value of the stock today_
*   _FCFE = expected FCFE for next year_
*   _r = cost of equity of the firm_
*   _g = growth rate in FCFE for the firm_

This model is used to find the value of the equity claim of a company and is only appropriate to use if capital expenditure is not significantly greater than depreciation and if the beta of the company’s stock is close to 1 or below 1.

## What Is Free Cash Flow to Equity (FCFE) Made of?

Capital expenditures, debt, net income, and working capital comprise free cash flow to equity (FCFE).

## What Is the Formula for FCFE?

Add capital expenditures and net debt issued, then subtract cash from operations, and you have free cash flow to equity.

## Who Uses FCFE?

Analysts often use free cash flow to equity to try to determine a company’s value

## The Bottom Line

Free cash flow to equity is a crucial financial metric that reveals the cash available to a company's equity shareholders after accounting for expenses, reinvestments, and debt repayments. FCFE serves as a vital indicator of a company's ability to self-fund dividends and share repurchases without relying on external financing. For investors, a high FCFE suggests sound financial health and efficient equity capital utilization, offering valuable insights for evaluating companies, especially those not issuing dividends.