Free cash flow is a widely used measure used by many analysts (Moody’s, S&P for example). It measures how much cash the firm produced for its stakeholders.
FCFF measures the cash produced for the debt and equity holders of the firm. It starts with CFO. Interest payment for the year are added back as typically they are available to the firms stakeholders. Net capital expenditures are taken away as cash spent on them is not available to the firms stakeholders.
FCFE measures the cash which remains for stockholders. It also starts with CFO, but doesn’t add in the interest payments as they are paid only to debtholders, and are thus not available to stockholders. If the firm has to use cash to pay back debtholders it is money the stockholders don’t have. Equally if the firm issues new debt, then the stockholders have in theory more cash.
I just remember the two formulas which start from CFO and don’t bother with the other formulas. If you understand what CFO consists of you should be able to calculate it if it is not given.
Hope this helps. |