levered free cash flow
Free Cash Flow to Equity
Formula: Net income + Depreciation and amortization - Capital Expenditure - Change in non-cash working capital 1 - Net borrowing
It is called free cash flow to equity (FCFE) or levered free cash flow (LFCF). Because it includes the effects of interest expense and mandatory debt repayments, it is cash that belongs only to shareholders.
Why is it used?
You can check the cash flow remaining after the company reinvests. The company can pay dividends to shareholders up to this amount of cash.
Profit is not cash flow
Profit is calculated by deducting expenses from revenue. However, under Accrual Accounting, some expenses are non-cash expenses, such as depreciation and amortization, which involve no actual cash outlay, so profit does not match actual cash flow.
The company's reinvestment cost
A company must reinvest, but the investment is not fully expensed at the time it is made; instead, it is deducted in portions over several years. Such capital expenditure may reduce current profit only slightly, but it reduces cash at the moment it is spent.
A counterargument to net borrowing
Cash that a company raises through borrowing can also be captured in shareholder free cash flow. Since dividends paid with debt raised for dividend payments cannot be sustained, if you are calculating for dividends, ignore the net cash flow that comes from debt.
Topics:
Up: FCF
Category: Wiki/Economy
Footnotes
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Deduct non-cash assets in working capital, such as Inventory Assets or Accounts Receivable. ↩