FCFE, Calculation formula

A free cash flow which is available to equity holders is called FCFE for short. This data is not readily available in reports but can be calculated using formula:

FCFE = Net Income + Depreciation and Amortization + net borrowing — CAPEX — changes in Working Сapital

This type of  cash flow (FCFE) is often used for evaluating equity fair value or intristic value for example by extended Gordon Growth model.

 

Example of FCFE calculation

We will calculate FCFE for  GAP Inc. company (ticker GPS).

1. First, we calculate the unknown values for substitution in the formula:
Net borrowing: (920+1249+5508) — (1249) = 6428
Capex: 702+343-220=825 (from table 3 we add up the amount of the purchase of equipment and buildings, and subtract the income from the sale of buildings)
Changes in Working Capital: (13679-3209-7154) — (8049-2174-2322) = -237 (data are taken from table #2, Working Capital = Total Assets — Total Liabilities)

2. Now let’s move on to the calculations using the basic formula:
+351 (Net Income, data are taken from table #1);
+557 (Depreciation, Amortization, data are taken from table #3);
+(6428) (Net borrowing) we have calculated above, in 1 point);
-825 (Capex we have calculated above, in 1 point);
-(-237) (changes in Working Capital we have calculated above, in 1 point).

FCFE = 351 + 557 + 6428 — 825 +237 = 6748

Таблица 1:

CONSOLIDATED STATEMENTS OF INCOME - USD ($) shares in Millions, $ in Millions12 Months Ended
Feb. 01, 2020Feb. 02, 2019
Revenues $ 16 383 $ 16 580
Cost of goods sold and occupancy expenses10 250 10 258
Gross profit6 133 6 322
Operating expenses5 559 4 960
Operating income574 1 362
Interest expense76 73
Interest income-30 -33
Income before income taxes528 1 322
Income taxes177 319
Net income $ 351 $ 1 003
Weighted-average number of shares - diluted (in shares)378 388
Earnings per share - basic (in dollars per share) $ 0.93 $ 2.61
Earnings per share - diluted (in dollars per share)0.93 2.59
Common Stock, Dividends, Per Share, Declared $ 0.97 $ 0.97

Таблица 2:

CONSOLIDATED BALANCE SHEETS - USD ($) $ in MillionsFeb. 01, 2020Feb. 02, 2019
Current assets:
Cash and cash equivalents $ 1 364 $ 1 081
Short-term Investments290 288
Merchandise inventory2 156 2 131
Other current assets706 751
Total current assets4 516 4 251
Property and equipment, net of accumulated depreciation of $5,839 and $5,7553 122 2 912
Operating Lease, Right-of-Use Asset5 402 0
Other long-term assets639 886
Total assets13 679 8 049
Current liabilities:
Accounts payable1 174 1 126
Accrued expenses and other current liabilities1 067 1 024
Operating Lease, Liability, Current920 0
Income taxes payable48 24
Total current liabilities3 209 2 174
Long-term liabilities:
Long-term debt1 249 1 249
Operating Lease, Liability, Noncurrent5 508 0
Lease incentives and other long-term liabilities397 1 073
Total long-term liabilities7 154 2 322
Stockholders' equity:
Common stock $0.05 par value, Authorized 2,300 shares19 19
Additional Paid in Capital0 0
Retained earnings3 257 3 481
Accumulated other comprehensive income40 53
Total stockholders' equity3 316 3 553
Total liabilities and stockholders' equity $ 13 679 $ 8 049

Таблица 3:

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Millions12 Months Ended
Feb. 01, 2020Feb. 02, 2019
Cash flows from operating activities:
Net income $ 351 $ 1 003
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization557 578
Amortization Lease Incentives0 -61
Operating Lease, Impairment Loss239 0
Share-based compensation68 91
Other Asset Impairment Charges98 14
Gain (Loss) on Disposition of PPE, Excluding Oil, Gas and Timber Property70 4
Non-cash and other items-10 -10
Gain (Loss) on Disposition of Property Plant Equipment-191 0
Deferred income taxes-81 65
Changes in operating assets and liabilities:
Merchandise inventory4 -154
Other current assets and other long-term assets105 -18
Accounts payable66 -78
Accrued expenses and other current liabilities110 -196
Income taxes payable, net of prepaid and other tax-related items86 113
Lease incentives and other long-term liabilities0 30
ChangeOperatingLeaseAssetAndLiabilitiesNet-61 0
Net cash provided by operating activities1 411 1 381
Cash flows from investing activities:
Purchases of property and equipment-702 -705
Payments to Acquire Buildings-343 0
Proceeds from Sale of Buildings220 0
Payments to Acquire Short-term Investments-293 -464
Sales and maturities of short-term investments293 177
Payments to Acquire Businesses, Net of Cash Acquired-69 0
Insurance proceeds related to loss on property and equipment0 0
Other0 -9
Net cash used for investing activities-894 -1 001
Cash flows from financing activities:
Payments of debt0 0
Proceeds from issuances under share-based compensation plans25 46
Withholding tax payments related to vesting of stock units-21 -23
Repurchases of common stock-200 -398
Cash dividends paid-364 -373
Other0 -1
Net cash used for financing activities-560 -749
Effect of Exchange Rate on Cash, Cash Equivalents, and Restricted Cash4 -10
Net increase (decrease) in Cash, Cash Equivalents, and Restricted Cash-39 -379
Cash, Cash Equivalents, and Restricted Cash at beginning of period1 420 1 799
Cash, Cash Equivalents, and Restricted Cash end of period1 381 1 420
Non-cash investing activities:
Purchases of property and equipment not yet paid at end of period85 93
Supplemental disclosure of cash flow information:
Cash paid for interest during the period76 76
Cash paid for income taxes during the period, net of refunds176 143
Operating Lease, Payments $ 1 244 $ 0