Free cash flow to equity
Cash flow available to equity holders after interest, principal repayments, and net new borrowing. Discounted at cost of equity to derive equity value directly.
FCFE = Net income + D&A − Capex − ΔWorking capital + Net borrowingFree cash flow to equity is the cash flow that belongs solely to shareholders after debt service has been paid. It starts from net income (which already nets out interest expense), adds back non-cash D&A, subtracts capex and working-capital investment, and adds net new borrowing (debt issued minus debt repaid). FCFE feeds an equity-value DCF directly when discounted at cost of equity, skipping the enterprise-value-to-equity-value bridge that FCFF requires. The advantage of FCFE is intuitive accounting alignment: the cash flows you are discounting are explicitly the ones available for buybacks and dividends. The disadvantage is sensitivity to capital-structure choices — a company that issues debt to fund operations will show large positive FCFE swings that do not reflect operating performance. For that reason FCFE is most reliable when leverage is stable; when leverage is changing, FCFF is the cleaner lens. We tend to use FCFE for banks and insurers, where the FCFF construct is awkward (interest is operating revenue), and FCFF for industrials and capital-intensive businesses with active capital-structure decisions.