unlevered free cash flow

Unlevered Free Cash Flow: A Comprehensive Guide

In financial modeling and valuation, knowing Unlevered Free Cash Flow (UFCF), also called Free Cash Flow to the Firm (FCFF), is key. It shows the cash available to everyone who has a stake in the business, including shareholders and those to whom the company owes money. It factors in operating costs, buying new things, and funds for daily operations.

This thorough guide will cover everything about Unlevered Free Cash Flow (UFCF). We’ll define it, explain its role in studying a company’s financial health, show how to calculate it and discuss its use in valuing companies. Knowing about UFCF will help you clearly see a company’s ability to create cash. This insight will help you make smarter choices when investing.

Understanding Unlevered Free Cash Flow

Unlevered Free Cash Flow (UFCF) is a key financial measure for a company. It looks at the money the company makes, not counting how it pays for its projects. Investors use this to see how much cash is available after everything else is paid for.

This metric helps investors understand how well a company can make cash from what it does every day.

Definition of Unlevered Free Cash Flow

Definition of Unlevered Free Cash Flow

To understand Unlevered Free Cash Flow, know it’s the cash that all who invest in the company can share. This includes those who own a piece of the company and those who lent it money.

Calculation-wise, it starts with the company’s earnings before interest and taxes. It then subtracts taxes to get to the net profit, adding back non-cash costs. Finally, it subtracts what the company spends on projects and any increase in the money it needs for daily operations.

Importance of Unlevered Free Cash Flow in Financial Analysis

Unlevered Free Cash Flow is crucial for comparing companies fairly. It ignores how a company chooses to pay for its growth, making it easier to see how much money each company makes on its own.

For investors and analysts using the Discounted Cash Flow method, UFCF is key. This method needs to look at a company’s future through its earnings potential without the weight of how it finances growth.

Calculating Unlevered Free Cash Flow

Calculating Unlevered Free Cash Flow

Unlevered free cash flow (UFCF) calculation demonstrates the cash a company generates from its operations without considering its debts. The UFCF formula incorporates EBIT, NOPAT, depreciation, capital expenditures, and current assets minus current liabilities.

Unlevered Free Cash Flow Formula

The UFCF formula is simple:

UFCF equals NOPAT plus Depreciation & Amortization, then minus Net Working Capital increase and Capital Expenditures.

To calculate NOPAT, you subtract taxes from EBIT. NOPAT and depreciation are key to calculating an accurate UFCF.

Components of the Unlevered Free Cash Flow Calculation

To calculate UFCF, you start with EBIT. You then deduct taxes to find NOPAT. Add back non-cash expenses like depreciation. Then, subtract the increase in net working capital and capital expenditures. Knowing that there will be bigger net working capital cuts, UFCF is very important.

Example of Unlevered Free Cash Flow Calculation

Let’s use a company with $250 million EBIT, a 26% tax rate, and $20 million in depreciation. They also have $40 million in capital expenses and a $5 million increase in working capital. Here’s how you can find the UFCF:

Calculate NOPAT first: $250 million * (1 – 0.26) = $185 million.

Add back depreciation: $185 million + $20 million = $205 million.

Minus the working capital increase: $205 million – $5 million = $200 million.

Then subtract the capital expenditures: $200 million – $40 million = $160 million.

In this case, the UFCF for the company is $160 million.

This shows how important UFCF is for understanding a company’s cash flow from operations. It helps investors and analysts evaluate its financial health accurately.

Unlevered Free Cash Flow in Valuation

UFCF is key when valuing a company. It is crucial in DCF analysis. This method looks at future cash and current value using WACC.

The first step is to predict cash flows for five to ten years based on future growth and spending. After making the prediction, we use WACC to find the current value.

Discounted Cash Flow (DCF) Analysis

The valued cash flows are summed. We also calculate a terminal value for future worth. This part assumes a steady growth.

The final value is called the company’s implied enterprise worth.

Determining Enterprise Value using Unlevered Free Cash Flow

Enterprise Value using Unlevered Free Cash Flow

This method values a company’s core without its debts. Adjustments are made to find what shareholders own. Extra cash is added, and debts and such are subtracted.

This way, we truly value a company’s potential cash. It also helps compare companies without debt getting in the way, which is helpful for smart investing.

Comparing Unlevered and Levered Free Cash Flow

Unlevered and leveraged free cash flow are important ways to examine a company’s health and performance. Both show how much cash a company makes, but they handle debt and interest costs differently. This makes each metric useful for a different kind of investor.

Unlevered free cash flow, known as FCFF, is the money available to everyone who invests in the company, including those who hold its debt and those who own its stock. It doesn’t count the costs of debt, like interest payments. So, it’s good to see how well a company can pay back everyone who has invested in it. This metric shows the company’s true value and how it benefits its investors and lenders.

Levered free cash flow, or FCFE, is the cash left for the stockholders after the company pays its debts. It looks at the money available to the company’s owners, including debt payments. This metric is key for stockholders because it tells them if the company can pay dividends or grow after handling its debts.


In the end, unlevered free cash flow, or UFCF, paints a true picture of how much cash a company actually makes. It looks at the money from the main business, not influenced by how much it borrows. This helps people fairly judge a company’s money situation and success. It’s good for comparing companies because it ensures fair comparison.

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