Unlevered Free Cash Flow (UFCF)

The cash flow of a corporation before interest payments is known as unlevered free cash flow (UFCF). Unlevered free cash flow can be computed by analysts using financial statements or disclosed in a company's financial accounts. Unlevered free cash flow demonstrates how much cash is available to the business prior to deducting debt obligations.

Leveraged cash flow (LFCF), which is the money left over after all of a company's bills are paid, can be contrasted with UFCF.

UFCF Calculation Formula

The Formula for UFCF is:

UFCF = EBITDA − CAPEX − Working Capital − Taxes

Where: UFCF= Unlevered free cash flow

​What Does Unlevered Free Cash Flow Determine?

Unlevered free cash flow is the total free cash flow generated by a firm. Leveraged cash flows occur after interest payments, which are another word for debt. Free cash flow that can be used to pay both stock and debt holders as well as other stakeholders in a company is known as unlevered free cash flow.

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 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.

Levered free cash flow, which is more likely to be reported by corporations with high debt levels, does not provide a good indication of the company's financial health. The chart depicts the performance of assets without taking into account any debt payments that were made to acquire such assets. Investors must consider debt commitments since overly leveraged enterprises are more likely to fail.

Limitations Of Unlevered Free Cash Flow

Businesses can manipulate unlevered free cash flow by firing employees, postponing capital projects, selling inventory, or delaying supplier payments in order to present better numbers. Investors should determine whether improvements in unlevered free cash flow are permanent or actually reflect improvements in the company's core business because all of these actions have an impact.

Seeing unlevered free cash flow in a bubble ignores a company's capital structure because it is calculated prior to interest payments.After interest payments are taken into account, a company's levered free cash flow may actually be negative, which could indicate future negative outcomes. Analysts should look for trends in both unlevered and levered free cash flow over time rather than placing undue emphasis on any particular year.

Conclusion

  • The amount of accessible cash a company has before taking into consideration its financial obligations is known as unlevered free cash flow (UFCF).
  • The money a business has left over after covering its operational costs and capital expenditures is known as free cash flow (FCF).
  • Investors are drawn to UFCF because it reveals how much cash a company has available to spend.
  • Levered free cash flow, which does account for debt commitments, can be contrasted with UFCF.
  • For performing discounted cash flow (DCF) analysis, UFCF is preferred.
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