Unlevered Free Cash Flow: Definition, Formula & Calculation

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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It provides a clearer picture of how effectively a company operates without factoring in its capital structure. Analysts typically use UFCF to assess enterprise value (EV) in discounted cash flow (DCF) analysis since it standardizes cash flow across firms with varying debt levels. Additionally, viewing UFCF separately from levered cash flows leads to ignorance of a well-designed capital structure to save overall cash flows. However, there are certain limitations to accounting and using unlevered free cash flow yield for business valuation. Because unlevered free cash flow ignores interest payments and financing decisions, it allows for better comparisons across companies that may have different levels of debt. For example, if two companies in the same industry have different capital structures, UFCF provides a clearer picture of which company is more efficient at generating cash from its operations.

At the same time, adding non-cash expenditures such as depreciation and amortization is necessary to determine a company’s unlevered cash flow. Levered free cash flow can also be used by bankers and buyers, but it has other internal uses. Business owners may rely on this metric to make decisions about future capital investments and improvements.

Unlevered Free Cash Flow (UFCF)

Cash flows that are levered already account for interest and other financial obligations. Instead of interest, unlevered free cash flow is net of CapEx and working capital needs—the cash needed to maintain and grow the company’s asset base to generate revenue and earnings. Non-cash expenses, such as depreciation and amortization, are added back to earnings to arrive at the firm’s unlevered free cash flow.

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This helps companies better manage their operating cash flows and effectively plan for capital expenditures and changes in working capital, a critical component of UFCF. UFCF is an important metric for investors and stakeholders as it gives an unfiltered view of a company’s financial health, growth potential, and overall ability to generate returns. By focusing on UFCF, stakeholders can make more informed decisions that drive long-term value.

Instead of paying hourly or hiring in-house staff, businesses can now access professional bookkeeping on a fixed monthly or annual subscription model. While unlevered free cash flow excludes debts, levered free cash flow includes them. Therefore, you’ll find that unlevered free cash flow is higher than levered free cash flow. Because it doesn’t account for all money owed, UFCF is an exaggerated number of what your business is actually worth. It can provide a more attractive number to potential investors and lenders than your levered free cash flow calculation.

How does UFCF differ from Levered Free Cash Flow (LFCF)?

UFCF margin would therefore represent the amount of cash available to a firm before financing charges as a percentage of sales. So, in this context, unlevered means the small business hasn’t borrowed any capital necessary to start and fund their operations. Regardless of how it is named, the most important thing to remember is that it’s indicative of gross (rather than net) free cash flow. Consequently, you should not only rely on this value but also include debt/interest coverage metrics such as the interest coverage ratio and the debt service coverage ratio. Predict cash flows by category or entity with 95% accuracy on daily, weekly, or monthly timelines.

Similarly, a board of executives may take a careful look at the levered free cash flow amount to prove equity or value to debt holders. By definition, levered free cash flow (LFCF) is the amount of cash that an organization or business holds onto after it has satisfied recurring financial obligations and payments. 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.

Companies with substantial debt (high leverage) often report unlevered free cash flow to present a more favorable view of their financial health. This metric reflects how well a company’s assets are performing independently, as it excludes debt repayment costs. The difference between unlevered and levered free cash flow is the inclusion of financing expenses. Levered free cash flow is the amount of cash a business has after it has met all of its financial obligations, such as interest, loan payments, and other financing expenses. Unlevered free cash flow is the money the business has before paying those financial obligations.

Unlevered free cash flow, like levered free cash flow, is free of working capital requirements and capital expenditures—the money required to maintain and expand the company’s asset base in order to unlevered free cash flow produce revenue and earnings. To calculate the company’s unlevered free cash flow, non-cash items like depreciation and amortization are added back to earnings. The cash flow of a corporation before interest payments is known as unlevered free cash flow (UFCF).

• From the above we can derive the fact that as analysts of investors, it is better to interpret both Unlevered and levered free cash flow of the business, so as to make informed decision.
• Unlevered FCF focuses on the company’s operational performance, while Levered FCF considers the impact of capital structure.
• Essentailly, these two perspectives provide a well-rounded picture of a company’s cash flow position.
• You have operating cash flow, discounted free cash flow, and both levered and unlevered free cash flow.

Thus, a firm with negative or low unlevered cash flow should strive to achieve EBITDA targets as soon as possible. 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. The necessary financial information to calculate Unlevered FCF can be found in a company’s financial statements, specifically the income statement, balance sheet, and cash flow statement.

This allows business owners to make faster, data-driven decisions, reduce errors, enhance tax compliance, and stay audit-ready. By leveraging cloud-based accounting tools and AI-driven automation, businesses can optimize financial strategy, scalability, and overall efficiency, making real-time bookkeeping an essential tool for growth and long-term success. When analysts value companies, they often use UFCF in discounted cash flow (DCF) models to calculate enterprise value. This approach ignores debt, focusing instead on the company’s overall ability to generate cash.

Unlevered Free Cash Flow: Definition, Calculation, Importance & Limitations

UFCF may also be used by department heads to establish annual budgets and to ensure that managers are using all available funds in effective ways. Depending on which type of free cash flow metric a company uses, there are different financial obligations to satisfy before stating the final amount. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. 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.

Management believes the company is now significantly undervalued, and has called in your firm to value the company and advise on their best options. Valuation is more than this simple formula because we must project changes in the Discount Rate and Cash Flow Growth Rate. All in all, sometimes it is better to call in the professionals, even if it’s for taking a second opinion. …but for valuation purposes in a DCF, you should use the definition here and project only the line items that go into Unlevered FCF. However, the resultant calculated EBITs of Firm A and Firm D may or may not be their target EBIT or EBITDA.

• HighRadius provides real-time visibility into global cash positions across various subsidiaries.
• Many investors and finance professionals calculate levered free cash flow (LFCF) to prove how much potential exists for the business to expand and scale.
• The main difference lies in the inclusion or exclusion of financial expenses while calculating.
• It is the cash flow available to all equity holders and debtholders after all operating expenses, capital expenditures, and investments in working capital have been made.

Companies capable of generating more unlevered FCFs possess more discretionary cash, which can be allocated to reinvestments in operations or to fund future growth strategies (e.g. capital expenditure). Unlevered free cash flow (UFCF) represents the cash flow left over for all capital providers, such as debt, equity, and preferred stock investors. A company is worth more when its cash flows or cash flow growth rate are higher, and it’s worth less when those are lower; the company is also worth less when it is riskier or when expectations for it are higher. In an LBO transaction, a company is acquired using a significant amount of borrowed money (leverage) to meet the cost of acquisition. Here, UFCF plays a critical role as it demonstrates how much cash the business can generate—money which could potentially be used to pay back the debt acquired for the LBO.

Investors must consider debt commitments since overly leveraged enterprises are more likely to fail. Unlevered free cash flow is the cash flow a business has, excluding interest payments. Essentially, this number represents a company’s financial status if they were to have no debts. The levered cash flow explains the cash flow situation of a business that carries out its operations through borrowings and thus attracts interest payments.