Calculating Free Cash Flow to Equity (FCFE) from EBITDA: A Step-by-Step Guide

You can calculate FCFE from EBITDA by subtracting interest, taxes, change in net working capitalNet Working CapitalNet Working Capital (NWC) is the difference between a company's current assets (net of cash) and current liabilities (net of debt) on its balance sheet., and capital expenditures – and then add net borrowing.

Free Cash Flow to Equity (FCFE)Free Cash Flow to Equity (FCFE)Free cash flow to equity (FCFE) is the amount of cash a business generates that is available to be potentially distributed to shareholders. It is calculated as Cash from Operations less Capital Expenditures. This guide will provide a detailed explanation of why it’s important and how to calculate it and several is the amount of cash generated by a company that can be potentially distributed to the company’s shareholders. FCFE is a crucial metric in one of the methods in the Discounted Cash Flow (DCF) valuation modelDiscounted Cash Flow DCF FormulaThis article breaks down the DCF formula into simple terms with examples and a video of the calculation. Learn to determine the value of a business.. Using the FCFE, an analyst can determine the Net Present Value (NPV)Net Present Value (NPV)Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present. of a company’s equity, which can be subsequently used to calculate the theoretical share price of the company.

The FCFE is different from the Free Cash Flow to Firm (FCFF)Free Cash Flow to Firm (FCFF)FCFF, or Free Cash Flow to Firm, is cash flow available to all funding providers in a business. debt holders, preferred stockholders, common shareholders, which indicates the amount of cash generated to all holders of the company’s securities (both investors and lenders). The formula below can be used to calculate FCFE from EBITDA:

FCFE = EBITDA – Interest – Taxes – ΔWorking Capital – CapEx + Net Borrowing

Where:

FCFE – Free Cash Flow to Equity

EBITDA – Earnings Before Interests, Taxes, Depreciation, and Amortization

ΔWorking Capital – Change in the Working Capital

CapEx – Capital Expenditure

FCFE from EBITDA Formula

Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) is one of the most commonly used metrics of a company’s profitability. Similar to Earnings Before Interest and Taxes (EBIT)EBIT GuideEBIT stands for Earnings Before Interest and Taxes and is one of the last subtotals in the income statement before net income. EBIT is also sometimes referred to as operating income and is called this because it's found by deducting all operating expenses (production and non-production costs) from sales revenue., EBITDA primarily assesses the company’s profitability from regular business activities. However, unlike EBIT, EBITDAEBITDAEBITDA or Earnings Before Interest, Tax, Depreciation, Amortization is a company's profits before any of these net deductions are made. EBITDA focuses on the operating decisions of a business because it looks at the business’ profitability from core operations before the impact of capital structure. Formula, examples also excludes depreciationDepreciation MethodsThe most common types of depreciation methods include straight-line, double declining balance, units of production, and sum of years digits. and amortization expenses, providing a better overview of the operating profitability.

The EBITDA is one of the components for calculating a company’s net income. Therefore, one of the approaches to determining the free cash flow to equity includes the use of the EBITDA metric. Recall that the company’s net income is related to EBITDA through the following equation:

Net Income = EBITDA – Interest – Taxes – Depreciation & Amortization

Thus, we can substitute net income in the FCFE from the net income formula with the equation above:

FCFE = EBITDA – Interest – Taxes – Depreciation & Amortization +

Depreciation & Amortization – ΔWorking Capital – CapEx + Net Borrowing

In addition, the formula above can be simplified by removing the two depreciation and amortization variables with opposite signs:

FCFE = EBITDA – Interest – Taxes – ΔWorking Capital – CapEx + Net Borrowing

Where:

• FCFE – Free Cash Flow to Equity
• EBITDA – Earnings Before Interests, Taxes, Depreciation, and Amortization
• ΔWorking Capital – Change in the Working Capital
• CapEx – Capital Expenditure

The above approach of calculating free cash flow to equity provides a more detailed overview of the composition of the FCFE. Note that such a level of granularity is not always required in a financial model. In some cases, it can result in negative effects, as it complicates the comprehension of a model.

However, it is acceptable to apply this variation of the FCFE calculation when the assessment of the company’s profitability from its regular business activities (excluding other expenses) is required.

FCFE from EBITDA Formula and Financial Statements

An analyst who calculates the free cash flows to equity in a financial model must be able to quickly navigate through the financial statements. The primary reason is that all the inputs required for the calculation of the metric are taken from the financial statements. The guidance below will help you to quickly and correctly incorporate the FCFE from EBITDA calculation into a financial model.

1. EBITDA: The company’s earnings before interests, taxes, depreciation, and amortization (EBITDA) are recorded on the company’s income statement.
2. Interest: The company’s interest expenses are located on the income statement after the EBIT.
3. Taxes: The tax payments can also be found on the income statement after the earnings before taxes (EBT).
4. CapEx: Capital expenditure (CapEx) can be found on the cash flow statement within the Cash from Investing section.
5. Change in Working Capital (can also be denoted as ΔWorking Capital) is calculated in the company’s cash flow statement within the Cash from Operations section.
6. Net Debt: The net debt amount is also located on the cash flow statement under the Cash from Investing section.

More Resources

Thank you for reading CFI’s explanation of how to calculate FCFE from EBITDA. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• EBIT vs. EBITDA GuideEBIT vs EBITDAEBIT vs EBITDA - two very common metrics used in finance and company valuation. There are important differences, pros/cons to understand.
• Projecting Income Statement Line ItemsProjecting Income Statement Line ItemsWe discuss the different methods of projecting income statement line items. Projecting income statement line items begins with sales revenue, then cost
• Relative Valuation ModelsRelative Valuation ModelsRelative valuation models are used to value companies by comparing them to other businesses based on certain metrics such as EV/Revenue, EV/EBITDA, and P/E
• Statement of Cash FlowsStatement of Cash FlowsThe Statement of Cash Flows (also referred to as the cash flow statement) is one of the three key financial statements that report the cash