Free Cash Flow to Equity (FCFE)

FCFE starts with the cash the business generates and then accounts for debt. It subtracts interest and debt repayments and adds any new borrowing. What remains could, in principle, be paid out to shareholders as dividends or share buybacks.

One way to calculate it is to take FCFF, subtract interest after tax and add net borrowing, meaning new debt raised minus debt repaid. For example, if FCFF is 16 million, after-tax interest is 3 million and the company repays a net 2 million of debt, FCFE is 11 million.

FCFE is used to value a company's shares directly. Because it belongs only to shareholders, it is discounted at the cost of equity rather than the weighted average cost of capital.

FCFE can swing from year to year when a company borrows or repays large amounts. A company could temporarily boost FCFE by borrowing heavily, so analysts look at trends over several years rather than a single figure.

Note: Levered free cash flow means the same as FCFE. "Levered" means calculated after payments to lenders.