Lesson 10 of 10 · All lessons in this module
- Competitive strategy and positioning
- Strategy over the life cycle and addressable markets
- Generic strategies in practice: capacity, moats and two kinds of focus
- Revenue drivers: bottom-up and top-down
- Pricing power
- Operating costs and operating leverageVideo lesson
- Operating profitability and working capital
- Choosing a profit margin, cost components and price elasticity
- Capital investments and capital structure
- FCFE, net capex and financing across the life cycle
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 10 of 10 · 14 min
FCFE, net capex and financing across the life cycle
Free cash flow to equity ties the income statement and balance sheet together (net income plus D&A, less investment in working capital and long-term assets, plus net borrowing), and its size, the need for capital spending and the room for debt all change as a company moves through its life cycle.
In short
- FCFE = net income + D&A − investment in working capital − investment in long-term assets + net borrowing. Sources: earnings, non-cash charges, new debt. Uses: working capital and long-term assets.
- Startups and young growth firms often have negative FCFE and little debt capacity; mature firms invest relatively less and can carry more debt.
- A longer cash conversion cycle is a use of cash that must be financed; production problems can balloon inventory.
- Net capital expenditure = capex − D&A: a gauge of growth in productive capacity.
- ROIC = NOPAT / average invested capital (long-term liabilities + equity); ROIC/WACC above 1 means excess returns.
- Capital structure follows the business model: equity for early-stage firms, long-term debt for long-lived assets. A debt-financed acquisition raises the debt ratio and lowers coverage; judge the plan to deleverage.
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