FCFE Calculator
Table of contents
What is FCFE?How to calculate FCFE? The free cash flow to equity formulaWhy use FCFE in company valuation?FAQsThis FCFE calculator is designed to help you easily calculate the free cash flow to equity (FCFE). FCFE is widely used to value a company's equity using the discounted cash flow valuation model. You can also use our discounted cash flow calculator to understand more about this.
By reading this article, you will understand what is FCFE and how to calculate it using the free cash flow to equity formula. We will also help you understand the FCFE valuation model. However, before we dive into more complex topics, let's talk about the definition of FCFE.
What is FCFE?
Free cash flow to equity (FCFE) is the cash flow available for distribution to all the company's equity holders after paying all the expenses, reinvestments, and debts. Specifically, one can understand FCFE as the cash flow available to common shareholders after meeting the company's expenses, working capital needs, and debt financing requirements.
Unlike FCFF (Free Cash Flow to the Firm), which is used to perform the valuation for the whole company, the FCFE valuation model focuses only on valuing the company's equity value. This makes FCFE one of the best metrics to use in valuing a company's share price.
Now, let's learn how to use the FCFE formula in the next paragraph.
How to calculate FCFE? The free cash flow to equity formula
Let's use Company Alpha as an example to help us understand the FCFE's concept. Company Alpha reports the following information:

Net income: $56,000,000;

Earnings before interest, taxes, depreciation, and amortization (EBITDA): $145,000,000;

Earnings before interest and taxes (EBIT): $95,000,000;

Cash flow from operation (CFO): $81,000,000;

Depreciation and amortization (D&A): $50,000,000;

Interest expenses: $15,000,000;

Corporate tax rate: 30%;

Fixed capital investment: $100,000,000;

Working capital investment: $25,000,000;

Beginning total debt: $110,000,000; and

Ending total debt: $134,000,000.
There are a couple of ways to calculate FCFE. In this article, we will introduce five FCFE formulae to help you calculate it. But, before this, we will need to calculate the net borrowing as it is needed regardless of what method you use to calculate FCFE.
We can calculate net borrowing NB
using the following formula:
NB = ending total debt  beginning total debt
Hence, Company Alpha's NB
is:
$134,000,000  $110,000,000 = $24,000,000

Calculate FCFE from net income.
Using
net income
,FCFE
can be calculated using the formula as follows:FCFE = NI + D&A  FCI  NWC + NB
where,
NI
— Net income;D&A
— Deprecation and amortization;FCI
— Fixed capital investment; andNWC
— Working capital investment.
For our example,
FCFE
for Company Alpha is:$56,000,000 + $50,000,000  $100,000,000  $25,000,000 + $24,000,000 = $5,000,000

Calculate FCFE from EBIT.
FCFE
can also be calculated fromEBIT
, which stands for earnings before interest and taxes, using theFCFE
formula displayed below:FCFE = EBIT × (1  CIT) + D&A  FCI  NWC  IE × (1  CIT) + NB
where:
IE
— Interest expense; andCIT
— Corporate tax rate.
Thus, Company Alpha's
FCFE
is:$95,000,000 × (1  30%) + $50,000,000  $100,000,000  $25,000,000  $15,000,000 × (1  30%) + $24,000,000 = $5,000,000

Calculate FCFE from EBITDA.
Moreover, earnings before interest, taxes, depreciation, and amortization, or
EBITDA
for short, is also one of theFCFE
components. Their relationship is displayed in the formula below:FCFE = EBITDA × (1  CIT) + D&A × CIT  FCI  NWC  IE × (1  CIT) + NB
For Company Alpha, its
FCFE
is:$145,000,000 × (1  30%) + $50,000,000 × 30%  $100,000,000  $25,000,000  $15,000,000 × (1  30%) + $24,000,000 = $5,000,000

Calculate FCFE from CFO.
We can also calculate
FCFE
fromCFO
, which is the cash flow from operation. The formula for this calculation is displayed below:FCFE = CFO  FCI + NB
where,
CFO
— Cash flow from an operation.
For our example, Company Alpha's
FCFE
is:$81,000,000  $100,000,000 + $24,000,000 = $5,000,000

Calculate FCFE from FCFF
Lastly, we can also obtain
FCFE
fromFCFF
, which stands for free cash flow to firm. We can achieve this by using the formula that follows:FCFE = FCFF  IE × (1  CIT) + NB
Thus, Company Alpha's
FCFE
can be calculated as:$8,500,000  $15,000,000 × (1  30%) + $24,000,000 = $5,000,000
You can use our FCFF calculator to calculate the
FCFF
.
Why use FCFE in company valuation?
One of the most significant advantages of using FCFE to perform a company valuation is that it values the company's equity directly. This is useful if you invest in the company as a common shareholder since you are only concerned with its equity value or share price. If we were to use FCFF instead, we would need to deduct the market value of debt from the results to obtain the equity value or share price. This process can be complicated as the market value of debt can be difficult to determine.
However, if the company being valued does not have a stable capital structure, it might be better to use FCFF instead. Also, if the company has a huge debt to service, resulting in a negative FCFE, it will be difficult to value it using the FCFE. In this case, FCFF is preferred.
Can FCFE be negative?
FCFE can be negative and most earlystage companies have a negative FCFE. A negative FCFE means the company's operation is costing its investors money instead of generating it.
What is the relationship between FCFE and FCFF?
FCFF stands for free cash flow to the firm. While FCFE is the cash available to distribute to the shareholders, FCFF represents the cash available for both debt and equity investors. Putting the relationship as an equation:
FCFE = FCFF  IE × (1  CIT) + NB
What is EBIT?
EBIT stands for earnings before interests and taxes. In short:
EBIT = net income + interest expenses + taxes
.
EBIT
can be interpreted as the operating income of a company.
What is EBITDA?
EBITDA stands for earnings before taxes, interest, depreciation, and amortization. Mathematically:
EBITDA = net income + deprecation and amortization + interest expenses + taxes
.
EBITDA
is usually understood as the gross profit.