Now that Cash Flow Statement is briefly explained, let us go through the various Cash Flow terms which is little
FCF FCFE FCFF
confusing i.e. Free Cash Flow (FCF), Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE)
Free Cash Flow
It is the Cash flow recorded by the Company as availablefor the company growth after taking care of its Operating expenses and Capex. Capex is the expense incurred during the year on assets and investments. The company might have added a new plant or replaced a plant and/or invested more in some securities or so on. It is a very essential expense which company can’t ignore. It is already calculated in the Cash flow statement as Cash from Investing Activities. We may also remove Dividends from it.
Basically it can be calculated as
FCF= Operating Cash Flow – Capex
OR
FCF= Operating Cash Flow – Cash from Investing Activities
Free Cash Flow to Firm (FCFF)
The cash flow available to the overall security holders of the company whether it is owners/equity-holders and debt-holders of the company. What makes it different from FCF is that we include the INTEREST for the debenture holders after removing the tax from the interest. Be clear that usually Tax is already removed from the Operating Cash Flow but we never calculate Interest which we pay there. So we add back the Interest and deduct the tax applicable on Interest towards Debt-holders. Now, this cash flow is what is available to all the firm
It can be calculated as
FCFF = Operating Cash Flow + [Interest *(1- tax)] – Capex
OR
FCFF = Operating Cash Flow + [Interest *(1- tax)] – Cash from Investing Activities
Free Cash Flow to Equity (FCFE)
As the name suggests it is the cash flow available for the equity shareholders after paying off all the obligations towards to the expenses and debt-holders. It shows how much of debt affects the company’s cash flow. The FCF would be adjusted after deducting the Interest or the Debt Repayment amount and adding any new Debt received as it indicates Cash inflow
FCFE = Operating Cash Flow – Capex – Debt Repayment + New Debt
OR
FCFE = Operating Cash Flow – Cash from Investing Activities – Debt Repayment + New Debt
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