Friday, May 15, 2009

Cash Flow Analysis, pt 5 - FCFE

[Cash Flow Analysis Series 1 CFO - 2 CFI - 3 CFF - 4 FCFF - 5 FCFE]

The second free cash flow methodology is Free Cash Flow to Equity (FCFE). This represents the cash that is available for distribution to owners. This is very important in determining the liquidity of a company in the short term as well as understanding the efficient use of cash in a company (no cash "idling").

Free Cash Flow to Equity is calculated as:

FCFE = CFO - FCInv + Net Borrowing - Net Debt Repayment

You'll notice there are some key differences between FCFE and FCFF.

First is the exclusion of interest expense effect (Interest Expense x (1 - Tax Rate)) and the addition of net borrowing and net debt repayment. The common thread between these items is that they are related to changes in net debt and related expenditures.

[Cash Flow Analysis Series 1 CFO - 2 CFI - 3 CFF - 4 FCFF - 5 FCFE]

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