Free Cash Flow to Equity (FCFE)
Candlefocus EditorFCFE is calculated by taking a company’s net income and then subtracting the capital expenditure and working capital from this number. Then, the debt payments are subtracted from this result to get the total amount of free cash available to equity shareholders. This measure is a helpful tool in understanding a company’s overall financial health, as well as predicting its future worth.
FCFE also gained popularity as an alternative to the dividend discount model (DDM), which values a company based on its dividend payments. As an example, a company that is not paying out dividends may still have positive FCFE, but it would not be able to be valued by DDM. For companies that are not paying dividends, FCFE provides a more accurate measure of the company's true worth and may be used to determine if it is a favorable investment opportunity.
Furthermore, FCFE is often used as an input into other financial models such as the Discounted Cash Flow (DCF) and Weighted Average Cost of Capital (WACC). FCFE may be used in these models to more accurately determine the value of a company and to assess the returns of potential investments.
Overall, Free Cash Flow to Equity provides a useful insight into a company’s financial health and helps assess its current and potential future worth. As an alternative to DDM, it is especially useful for companies not paying out dividends, such as start-ups and other high-growth organizations. By understanding FCFE, investors can make more informed decisions and ensure they are making investments that are most likely to succeed.