Free Cash Flow to Equity

Free Cash Flow to Equity

Free Cash Flow to Equity (FCFE) is used by analysts, inter alia, to value companies. It measures the cash a company has available to return to shareholders – if it so chooses – either in the form of dividends or share buybacks. To calculate FCFE, the starting point is net income. From net income, the capital expenditure (capex) is deducted (as it is a cash outflow). Depreciation, amortisation and impairment are added back (as they are non-cash charges). This figure is adjusted again -- first for changes in non-cash working capital (i.e. net accounts receivable plus net inventory minus accounts payable) and second to account for net debt i.e. principal debt repayments (a cash outflow) and proceeds of new debt (a cash inflow). Free Cash Flow to Equity = Net income - Capital expenditure + Non-cash charges (expenses that reduce reported income but do not result in cash outflow) - Working capital investment - Net debt payments

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