How to Calculate FCFE from Net Income

How to Calculate FCFE from Net Income

Free Cash Flow to Equity (FCFE) is a valuation metric that determines the amount of cash that is potentially available to equity shareholders after all the expenses of the company have been taken care of. Put simply, it is the amount of cash that the company generates after meeting various obligations such as capital expenditure, re-investment, debt, and other expense obligations.

FCFE from Net Income Formula

Free cash flow to equity (FCFE) can be calculated in many ways. To calculate the FCFE from net income, we need to look at the formula and break it down. Here is the formula to calculate FCFE from net income:

FCFE = Net Income + Depreciation & Amortization – CapEx – ΔWorking Capital + Net Borrowing

However, FCFE is usually derived by using the free cash flow to the firm (FCFF) formula. To reconcile this, let’s look at how we get FCFE from FCFF. Here is the formula for FCFF:

FCFF = Net Income + Depreciation & Amortization – CapEx – ΔWorking Capital + Interest Expense (1 – t)


FCFF – Free Cash Flow to the Firm

CapEx – Capital Expenditure

ΔWorking Capital – Net change in the Working Capital

t – Tax rate

Notice that FCFE and FCFF share very similar terms such as depreciation, capital expenditures, and changes in working capital. The main difference between the FCFF and FCFE is the impact of interest expenses and their tax shields. Therefore, the FCFE can be calculated using the FCFF formula:

FCFE = FCFF + Net Borrowing – Interest Expense (1 – t)

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FCFE valuation

When valuing a company, it’s important to distinguish between the Enterprise Value and Equity Value. The Enterprise Value is the value of the entire business without taking its capital structure into account. Equity Value is the value attributable to shareholders, which includes any excess cash and exclude all debt and financial obligations.