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How to Calculate Free Cash Flow to Equity

Updated on August 10, 2013

FCFE Calculation

FCFE = Net Income + Depreciation & Amortization - Capital Expenditure - Change in Non-Cash Working Capital + New Debt Issued

Calculate Free Cash Flow to Equity

Free Cash Flow to Equity (FCFE) is a valuation measure often used by analysts.

The dividend discount model has not been as effective and this has made way for the FCFE as a popular discounted cash flow (DCF) technique.


Coca-Cola FCFE for 2012

It always helps to have an example and I am going to use Coca-Cola Company's (KO) financial figures to calculate the FCFE. I will be pulling these figures from Morningstar.

The first step will be to find the Net Income from the KO Income Statement for 2012. Generally, this will be the 'bottom line' signifying a widely used term in finance and financial statements. For Coca-Cola, the net income is $9.806B for the year ending Dec 31, 2012.

Coca-Cola's Income Statement
Coca-Cola's Income Statement

Add depreciation and amortization

These are listed here on the Cash Flow Statement, though they usually appear on the income statement. Earnings are negatively impacted by these accounting expenses, but the key thing is that they are not cash expenses. For Coca-Cola, depreciation & amortization expense is $1.982B. Adding this to the net income figure, we get $11.068B.

Coca-Cola's cash flow statement
Coca-Cola's cash flow statement | Source

Subtract Capital Expenditure, which is listed in the 'Free Cash Flow' section of the Cash Flow Statement

For Coca-Cola, capital expenditure is $2.780B for the year ending Dec 31, 2012. Subtracting this from our previous total of $11.068B, we are now at $8.288B.

Coca-Cola's cash flow statement
Coca-Cola's cash flow statement | Source

Subtract Change in Non-Cash Working Capital, taken from the 2012 Balance Sheet.

Cash flows go down when there is a rise in inventory levels and account receivable amounts. At the same time, any increases in accounts payable cause cash flows to go up. And any rise in non-cash working capital will reduce cash flow.

Coca-Cola's Balance Sheet
Coca-Cola's Balance Sheet | Source
Coca-Cola's Balance Sheet with Current Liabilities Boxed
Coca-Cola's Balance Sheet with Current Liabilities Boxed
  1. For Coke, non-cash working capital on Dec 31, 2011 equals $25.497B (current assets) - $12.083B (cash) - $24.283B (current liabilities) = -$11.589B
  2. Non-cash working capital on Dec 31, 2012 equals $30.328B (current assets) - $8.442B (cash) - $27.821B (current liabilities) = -$5.935B.
  3. The change in non-cash working capital over this period equals -$5.935B - (-$11.589B) = $5.654B. Subtracting this from our previous value of $8.288B, we now get $2.634B.

Add net debt issued

The change in 'Long term debt' which appears in the Balance sheet can be used to the get 'New Debt Issued' value. Basically, new debt issues minus the total principal that has been repaid. For Coca-Cola, Long term debt is $13.656B on Dec 31, 2011, and $14.736B on Dec 31, 2012.

Then the net debt issued is $1.080B.

FCFE Value

We add the net debt issued value of $1.080B to the previous value we found ($2.634B) and this gives us $3.714B.

This is the Free Cash Flow to Equity for the Coca-Cola Company.

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