Free cash flow to equity (FCFE) is the amount of cash a business generates that is available to be potentially distributed to [shareholders It is calculated as Cash from Operations less [Capital Expendituresplus net debt issued. This guide will provide a detailed explanation of why it’s important and how to calculate it, along with several examples.
Let’s look at how to calculate Free Cash Flow to Equity (FCFE) by examining the formula. It can easily be derived from a company’s [Statement of Cash Flow
FCFE = Cash from Operating Activities – Capital Expenditures + Net Debt Issued (Repaid)
Below is a screenshot of Amazon’s 2016 annual report and statement of cash flows, which can be used to calculate free cash flow to equity for years 2014 – 2016.
Let’s look at an Excel spreadsheet a financial analyst would use to perform an FCFE analysis for a company.
As you can see in the figures below, the company has a clearly laid out Statement of Cash Flows, which includes three sections: Operations, Investments, and Financing.
As you can see, in one year the company posted very positive FCFE and in another year, it was very negative, even though operating activities weren’t as dissimilar. The reason for this was the significant investment that was made in purchasing additional PP&E.
Since equity investors must fund the purchase of such assets, the Free Cash Flow to Equity figure must account for this.