Definition
Free Cash Flow to Equity (FCFE)
Free Cash Flow to Equity is the cash available to a company's shareholders after operating expenses, capital expenditure, taxes and net debt repayments.
FCFE starts from operating cash flow, subtracts capex, then adjusts for net borrowing (new debt raised less repaid). It measures what could theoretically be paid out to equity holders as dividends or buybacks without impairing operations.
FCFE is discounted at the cost of equity in equity-level DCF valuation, in contrast to FCFF which is discounted at the WACC. A company generating strong, growing FCFE has genuine capacity to reward shareholders, a key check on the sustainability of its dividends.
Related terms
- Free Cash FlowFree cash flow (FCF) is the cash a company has left after paying operating expenses and capital expenditure, available to reward investors or grow.
- Dividend Payout RatioThe dividend payout ratio is the share of net profit a company distributes to shareholders as dividends, with the rest retained for growth.
- Discounted Cash Flow (DCF)DCF is a valuation method that estimates a company's worth by projecting its future cash flows and discounting them back to today's value.
- Free Cash Flow to Firm (FCFF)Free Cash Flow to Firm is the cash a company generates for all its capital providers, debt and equity, after operating expenses, taxes and capital expenditure.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.