Author:
Eric Farmer
Date Of Creation:
7 March 2021
Update Date:
1 July 2024
Content
Free Cash Flow to Equity (FCFE) is a measure of the potential dividend on equity capital. This is the amount of money that will remain after taxes, interest payments and necessary deductions for new investments. Follow these steps to calculate the FCFE. For illustration, we will calculate this figure for Kellogg.
Steps
1 Find net income in the company's latest Income Statement. It is usually located at the bottom of the report. For Kellogg, Net Income is $ 1,247 million for the 2010 calendar year. 
2 Add depreciation and amortization, which is usually found in the income statement, but also appears in the cash flow statement. These are accounting costs that reduce income, but are not cash costs. For Kellogg, amortization costs are $ 392 million. Add this to net income and get $ 1,639 million. 
3 Subtract the capital expenditures shown in the “Investing Activities” section of the Statement of Cash Flows. For Kellogg, capital expenditures total $ 474 million for 2010. Subtracting this amount from $ 1,639 million, we get $ 1,165 million. 
4 Subtract the change in non-cash working capital from the latest Balance Sheet. An increase in materials and accounts receivable reduces cash flow, while an increase in accounts payable increases cash flow. The growth of non-cash working capital reduces cash flow. For Kellogg, non-cash working capital at the beginning of 2010 is $ 2,558 million (current assets) - $ 334 million (cash) - $ 2,288 million (current liabilities) = - $ 64 million. Non-cash working capital at the end of 2010 is $ 2,915 million. (current assets) - $ 444 Million (cash) - $ 3184 million (current liabilities) = - $ 713 million Change in non-cash working capital for this period was - $ 713 million - (- $ 64 million) = - $ 649 million Subtracting this amount out of $ 1165 million, we get $ 1814 million. 
5 Add in the increase in net debt, which is calculated as new debt minus debt repayments over the period. This can be calculated as a change in "Long-term liabilities" in the Balance Sheet. For Kellogg, long-term debt is $ 4835 million at the beginning of 2010 and $ 4908 million at the end of 2010. So, the net increase in debt was $ 73 Million. Add this value to $ 1,814 million and get $ 1,887 million - the desired free cash flow to capital (FCFE).
