FCFE calculator is meant to assist in calculating the free cash flow to equity in an easy and quick way. That can make it easy to determine the value equity of a company. This calculator is particularly useful for small businesses. However, this is not to say large businesses should not use it either.
This financial tool will help you with your cash flow by providing you with the information you need. It can be used to easily check cash flows for a business or project. In this article, we will review the FCFE calculator and cover everything you need to know about the free cash flow to equity like how it’s calculated, used, and much more.
What is the Free Cash Flow to Equity (FCFE)?
Before explaining the FCFE, we will shed some light on free cash flow because you need to have an idea of what it stands for and go from there. Free cash flow is the amount of cash that a company generates from its operations. In other words, it is a measure of how much money a business makes after it pays for all its expenses.
The free cash flow is also known as operating cash flow, or operating profit after tax minus capital expenditure and investment. It can be used to determine the value of a company. It is important to note that free cash flow is not impacted by the company’s capital expenditures and investments. As you may already know, cash flow is a critical component of sustainability for a business or a project, as it’s a measure of the ability of a company to generate sufficient cash to offset its cash outflows.
FCFE Definition and Usage
Now that you know more about free cash flow, it’s time to check how FCFE (free cash flow to equity) is defined. It is usually defined as the cash flow that can be distributed to every equity holder of the company once all the debts, costs, and reinvestments are paid.
Therefore, all the common shareholders will have FCFE at their disposal after paying expenses and meeting both debt financing and working capital requirements. In contrast to Free Cash Flow to Firm (FCFF), this valuation model concentrates solely on the equity value instead of the value of the entire company.
This makes a difference between these valuation models. Also, this makes free cash flow to equity the most useful metric for evaluating the share price of the company. Keep reading to learn how the FCFE formula is used.
FCFE Formula: How to Calculate Free Cash Flow to Equity?
In this section, we will explain the FCFE formula. Free cash flow to equity can be calculated in a few different ways. For instance, it can be calculated from:
- Net income using this formula: FCFE = NI + D&A – FCI – NWC + NB
- Earnings before interest and taxes (EBIT). The formula is: FCFE = EBIT * (1 – CIT) + D&A – FCI – NWC – IE * (1 – CIT) + NB
- EBITDA (earnings before interest, taxes, depreciation, and amortization). The formula is: FCFE = EBITDA * (1 – CIT) + D&A * CIT – FCI – NWC – IE * (1 – CIT) + NB
- Cash flow from operation (CFO): FCFE = CFO – FCI + NB
- Free cash flow to firm (FCFF): FCFE = FCFF – IE * (1 – CIT) + NB
We recommend calculating FCFE from net income whenever possible. Our calculator is designed based on the following formula:FCFE = NI + D&A – FCI – NWC + NB
Where:
- NI is net income. Net Income is a key metric of profitability. It is calculated by subtracting the cost of revenue from the gross profit. The net income is calculated by subtracting the total revenue from total costs and then dividing that amount by the total revenue. It can be calculated as follows: Total Revenue – Total Costs = Net Income
- D&A stands for depreciation and amortization. Depreciation is the process of allocating the cost of a fixed asset over its useful life. Amortization is the process of allocating the cost of a financial asset, such as a loan, over time. Depreciation and amortization are important because they allow you to deduct some or all of an asset’s value from your taxable income.
- FCI means fixed capital investment. It is the sum of investments in fixed assets, such as buildings and machinery. This is one of the most important components of aggregate demand and economic growth. The term “fixed capital” is used to distinguish it from “circulating capital” (the stock of money) and “working capital” (current assets minus current liabilities). For example, fixed capital includes land, buildings, equipment, machinery, tools, and vehicles.
- NWC is a working capital investment (it is also known as net working capital). Working capital is the money a company needs to operate its business. This includes the funds needed to meet short-term obligations and maintain liquidity. The working capital ratio measures how quickly a company can pay off its debts using its current assets, such as inventory or accounts receivable.
- NB is net borrowing. It is calculated as follows: NB = ending total debt – beginning total debt
Example
Now that you are familiar with every element of the FCFE formula, we will provide an example to help you understand how to apply this formula. Take a look below!
- Net Income: $100,000
- Depreciation and amortization: $1,000
- Fixed capital investment: $10,000
- Working capital investment: $2,000
- Beginning total debt: $2,990
- Ending total debt: $3,200
First, you need to calculate net borrowing. In our example, it is 210 dollars (NB = $3,200 – $2,990). Now you can calculate the FCFE. If we apply the formula based on the net income, the free cash flow to equity will be as follows:
FCFE = NI + D&A – FCI – NWC + NB
FCFE = 100,000 + 1,000 – 10,000 – 2,000 + 210
FCFE = $ 89,210
Note that the value of the free cash flow to equity can be negative sometimes. This is especially true for early-stage firms. If the company’s FCFE is negative, this means its operation doesn’t generate cash, but it costs the investors money.