Business

What is Unlevered Free Cash Flow?

Panna Kemenes

22.09.23 (updated more than 1 year ago)

Read time 2 minutes

Unlevered free cash flow (UFCF) is a company’s free cash flow before it makes debt payments. The UFCF formula is a common formula used to measure a company’s ability to generate cash flow. It is commonly used to analyze publicly traded companies and even smaller businesses.

Unlevered free cash flow provides a clear picture of how a company is performing after paying capital expenditure and its working capital needs. It’s important to take a look at a company’s debt if you use this metric to analyze.

What is Unlevered Free Cash Flow (UFCF)?

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.

Companies with higher levels of debt may report unlevered free cash flow. These companies do this because this ratio is generally more favorable because it excludes debt payments.

Unlevered Free Cash Flow Formula

Below is a formula that shows you how to calculate unlevered free cash flow:

Unlevered free cash flow = EBITDA - CAPEX - Working Capital

This formula begins with the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA).

After this, you subtract the company’s capital expenditure (CAPEX). CAPEX can include investments in buildings, equipment and other assets.

After this, you subtract the company’s working capital, which measures a company’s ability to pay its short term obligations (current assets, current liabilities).

You can also read the guide on how to calculate free cash flow

Why is it Useful to Calculate Unlevered Free Cash Flow?

It can be more useful to use unlevered free cash flow if you are comparing the financials of two similar companies. It can be hard to compare companies that have different capital structures.

Moreover, this formula can also provide a better picture of how a company could improve its cash flow after paying off more of its debt. Companies may have strong unlevered cash flow, but weak or even negative levered free cash flow.

This formula is also useful if you want to determine what a business is worth.¹ You can use this to perform a discounted cash flow and calculate the net present value of a company.

Unlevered vs Levered Free Cash Flow

It’s essential to consider the following when analyzing unlevered vs levered free cash flow:

Levered free cash flow includes the total free cash flow after the company has made its debt payments. These expenses can include interest, loan payments, and other financing expenses. Unlevered free cash flow is its cash flow before it makes these payments.

Therefore, the unlevered free cash flow calculation can be notably higher if a company has a lot of debt. It could make a company’s free cash flow appear better than it is in reality. You should also calculate the levered free cash flow if your business has a lot of debt.

Download the Free Cash Flow Statement Template From Wise

Cash flow may be one of the most important parts of a smaller company’s financials.

If you are searching for an unlevered free cash flow template, you can use the free cash flow template from Wise.

You can use the indirect method to create the statement of cash flows from the information in the balance sheet and income statement.

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Sources:

Unlevered Free Cash Flow (UFCF): Guide, Formula & Examples

Sources checked September 2023.

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