Free cash flow to equity gives us an idea about the amount of equity available to the shareholders. This amount of equity available is calculated after accounting for the capital needed for the expenses and future growth.
It can be calculated as
Net Income – Net change in Capital Expenditure – Net Change in Working Capital + New Debt - Debt Repayment
It is used by the analysts to determine to find out the value of the company.
Example
In the formula starting point is the company’s earnings. From this the capital expenditure is subtracted which is the amount needed for buying assets needed for future growth. Next increase in working capital is subtracted which is the increase in capital needed for short term company’s operations. Finally net borrowing amount is added or subtracted as required.
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