Hi, When we talk about the EV/FCF for a firm , I always thought the FCF was the FCFF. But, i have seen a couple of reports lately , where the analyst seems to be using FCFE for the EV/FCF . Doesn’t make any sense to me . I thought both the numerator and denominator of the ratio had to belong to the same stakeholder , ( equity , debt or equity + debt ) . Clearly EV is a firmwide measure but FCFE is an equity measure. Can someone throw some light on this ? Thanks.
That does seem strange. The EV should be independent of the financing, which means that EV/FCFF is the right number. If the company is not financed with much debt, then I guess the multiples would be similar. Edit: Actually, I guess EV is not completely independent of financing, since the debt-equity financing would affect WACC, and the EV would be the PV of all Future Free Cash Flows to the Firm when discounted at WACC.
> where the analyst seems to be using FCFE for the EV/FCF that analyst is MBA, not CFA
It probably has to do with that it is easier and quicker to compute FCFE than FCFF from the cashflow statement, e.g. you don’t have to adjust for interest expense tax sheid
Actually , these are tech companies that do not have much debt. So , as bchadwick mentioned the FCFE and FCFF is probably similar and the WACC is pretty close to cost of equity so the difference is probably more like a rounding error.