Unlevered Free Cash Flow Calculator

Companies may manipulate UFCF figures by laying off employees, postponing capital projects, selling off inventory, or delaying payments to suppliers. UFCF allows investors to evaluate how efficiently a company is generating cash from its core business operations, independent of its debt structure. This makes it easier to compare companies within the same industry regardless of their financing choices. Unlevered Free Cash Flow is an essential metric for investors seeking to understand a company’s operational efficiency without the influence of its debt structure. By focusing on UFCF, investors can make more informed decisions and better assess the true value and health of a company. In addition, a strong free cash flow profile implies that the company generates sufficient cash to meet interest payments on time and repay the debt principal on the date of maturity.

Order to Cash

Therefore, the current enterprise value of the business can be calculated using the UFCF, that make peer comparison possible. Industries with significant capital expenditures and varying debt levels, such as manufacturing, utilities, and technology, benefit from UFCF analysis as it provides a clearer view of operational efficiency. A strong UFCF often signals robust operational performance and financial health, which can positively influence investor confidence and, consequently, the company’s stock price. Excluding interest payments allows for a more straightforward comparison of companies, as it removes the impact of different financing strategies. This is particularly useful for investors looking at companies with varying levels of debt.

Likewise, flexible and higher unlevered cash flows will allow firms A and D to expand their operations and business ventures by leveraging additional debt or borrowings. Unlevered free cash flow represents the cash generated by a company’s operations after covering all expenses required to maintain its operations and assets, but before accounting for interest and taxes. UFCF indicates a company’s ability to generate cash for future investment, debt repayment, and interest rate reductions. Unlevered free cash flow is the company’s cash flow generated before it makes its debt payments. It shows the amount of cash a company generates after paying operating expenses, capital expenditures, and other investments. The unlevered free cash flow is of interest to investors and shareholders who use these numbers from a company’s financial statement to determine discounted cash flow (DCF) or future returns on their present investments.

These expenses can include interest, loan payments, and other financing expenses. As you can see, the equation for unlevered free cash flow is less extensive than the one for levered free cash flow. That’s because the levered free cash flows equation subtracts debt and equity to yield operating cash only, while unlevered free cash flows do not. Unlevered free cash flow is the cash flow a business has, excluding interest payments.

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Unlevered Free Cash Flow (UFCF) is a vital financial metric that measures the cash a company generates before accounting for interest payments on its debt. Unlike traditional cash flow calculations, UFCF provides a clearer picture of a company’s financial health by excluding debt-related expenses. When evaluating your company, investors may ask to see unlevered and levered cash flows. Ideally, you want to show investors unlevered cash flow projections, as this will paint your business in a better light. Still, owners and investors shouldn’t jump to conclusions if levered free cash flow is negative or very low for a single period.

Essentially, this number represents a company’s financial status if they were to have no debts. To calculate the value of a company using a discounted cash flow (DCF) model, we use unlevered free cash flow to determine its intrinsic value. The idea is that FCFE includes the impact of debt on cash flow, including interest expense. Because debt holders have higher-ranking rights, equity holders only get paid after debtors. The company has a real, non-theoretical cash flow after interest expenses and principle repayments. The idea is that unlevered free cash flow excludes all impacts of debt on cash flow, including interest and the tax benefits of interest expense.

The firm, therefore, has a theoretical cash flow in the case it had no debt — its free cash flow. You can also take cash flow from operations from the cash flow statement as the starting point, as we’ll see in the formulas section below. In short, each metric, whether levered or unlevered, tells a different story about a business’s finances and is used in different circumstances.

Unlevered vs. Levered Free Cash Flow

On the other hand, Levered FCF takes into account interest expenses and tax payments, reflecting the cash available to equity holders after servicing debt obligations.
And there are two ways you can do that by extending this simple formula into “real” valuation.
Again, it is because the future earnings from current investments and business operations should reflect higher cash flows for its investors.
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A second approach is to use “valuation multiples” as shorthand, skip these long-term projections, and value a company based on what other, similar companies in the market are worth. He is a transatlantic professional and entrepreneur with 5+ years of corporate finance and data analytics experience, as well as 3+ years in consumer financial products and business software. He started AnalystAnswers to provide aspiring professionals with accessible explanations of otherwise dense finance and data concepts. Noah believes everyone can benefit from an analytical mindset in growing digital world.

Either way, understanding levered and unlevered free cash flow is crucial for assessing profitability and the impact of debt on your business. The unlevered free cash flow (UFCF) represents the money left from the operations of the company to pay to the stockholders (with dividends for example) and debtholders (principal's debt and interests). UFCF offers a pure reflection of a company’s ability to generate cash through its core business operations. Investors can use it to gauge how well management is running the business and whether the company has the potential to reinvest in growth or return capital to shareholders.

Companies with significant debt loads may prefer to highlight UFCF to present a more favorable image. They might delay capital-intensive projects, postpone payments to suppliers, or reduce their workforce to improve UFCF figures. However, these actions may not reflect the company’s long-term financial stability. However, investors should also consider a company’s debt obligations, as firms with high leverage face a greater risk of bankruptcy. Change in working capital is the difference in a company’s current assets and liabilities during a certain timeframe. Since firms must pay financing and interest expenses on outstanding debt, unlevering removes that consideration from the analysis.

What is levered free cash flow?

For example, if you’re comparing two companies in the same industry, one heavily in debt and the other debt-free, UFCF lets you see how well each is performing without the numbers skewed by financing costs. Unlevered free cash flow is a great way to look at the viability of a business, without taking debt and interest into account. Sometimes, a business's true value can be obscured if much of its cash flow is being eaten away by debt and not allowing the business to function properly.

This can be misleading, as a firm with high debt may show a positive UFCF but have a negative levered free cash flow (LFCF) after accounting for interest expenses.
In DCF analysis, UFCF is foundational for estimating a company’s intrinsic value.
On the other hand, use levered free cash flow when you want to see how much cash is left after paying debts, which helps you understand if you have funds to expand, pay shareholders, or reinvest in your business.
These expenses can include interest, loan payments, and other financing expenses.
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The “Cash Flow” parts are intuitive because they’re similar to earning income from a job in real life and then paying for your expenses – they represent how much you earn in cash after paying for expenses and taxes. This is the concept of intrinsic value, and it applies to company valuations as well. In a sentence, the value of a company, like a home, is the cash flows it produces without the effect of debt. This helps investors understand how cash performance of companies compares to price performance.

Companies use free cash flow to evaluate their profitability and financial health. Free cash flow provides insights into your company’s ability to generate additional revenues, manage capital expenditures, and handle changes in working capital, as seen on the balance sheet. FCF excludes non-cash expenses, such as depreciation and amortization, which are reported on the income statement.

In some cases they’re necessary, but in many the simple FCF will meet the needs of decision makers. When applying the discount rate, it’s important to consider factors such as the company's cost of capital, market risk premium, and the risk-free rate. A higher discount rate typically indicates greater risk and will result in a lower present value of future cash flows, whereas a lower discount rate suggests less risk and a higher present value. By discounting the future Unlevered FCF, investors can estimate the intrinsic value of a company unlevered fcf formula and compare it to its market price.

This is a good investment in the future of the company (presumably), which means it’s not really a bad thing that your UFCF was negative for that period. Your first stop should be to spot whether free cash flow (levered or unleveled) is positive or negative. If one is bootstrapped and the other is highly leveraged with debt equity, UFCF levels the playing field and allows investors to compare the companies on a cash basis. So, it’s the amount of cash a business has left over after paying for everything it actually has to. It’s also unusual that this is positive for a retailer like Michael Hill, meaning that Working Capital boosts its cash flow, but aspects of its business model might explain that. Deferred Income Taxes represent differences between taxes on the Income Statement and what the company actually pays in cash.

FAQ - Unlevered Free Cash Flow (FCF)

On the other hand, Levered FCF takes into account interest expenses and tax payments, reflecting the cash available to equity holders after servicing debt obligations. Unlevered FCF focuses on the company's operational performance, while Levered FCF considers the impact of capital structure. It represents the cash flow available to investors before interest payments and taxes. Unlevered free cash flows are generally taken into consideration over levered free cash flow (LFCF) when building a DCF model because UFCF separates the operational performance of businesses from its financing decisions. By focusing on cash flows generated before debt and interest payments, UFCFs provide a clearer understanding of a company’s fundamental profitability and its ability to generate cash from core operations. In contrast, levered free cash flow is used by business owners to make decisions about future capital investments, as it shows the cash available after meeting debt obligations.

This figure gives a comprehensive view of the actual cash available after accounting for both capital expenditures and debt obligations. As we mentioned above, free cash flow is a measure of how much cash remains after a company has covered its operating expenses and capital expenditures. Free cash flow yield, on the other hand, calculates how much of this free cash an investor is entitled to relative to the company’s market value. Unlevered free cash flow starts with EBIT and the effective tax rate or NOPAT; meanwhile, levered free cash flow starts with EBITDA. Besides, LFCF is net of mandatory debt payments, whereas UFCF is the free money available for paying debt principal and interests and any benefit for stockholders.