What Is Unlevered Free Cash Flow (UFCF)?

Unlevered free cash flow (UFCF) is a company's cash flow before accounting for interest payments. UFCF shows how much cash is available to the firm before taking financial obligations into account. It is reported on a company's financial statements or may be calculated using financial statements by analysts. UFCF is the opposite of 澳洲幸运5官方开奖结果体彩网:levered free cash flow (LFCF), which is the 🧜money left over after all a♍ firm's bills are paid.

Formula for Unlevered Free Cash Flow (UFCF)

The formula for UFCF uses earnings bꦑeꦏfore interest, taxes, depreciation, and amortization (EBITDA), and capital expenditures (CAPEX):

$\begin{aligned} &\text{UFCF} = \textit{EBITDA} - \textit{CAPEX} - \text{Working Capital} - \text{Taxes} \\ &\textbf{where:} \\ &\text{UFCF} = \text{Unlevered free cash flow} \\ \end{aligned}$​UFCF=EBITDA−CAPEX−Working Capital−Taxeswhere:UFCF=Unlevered free cash flow​

澳洲幸运5官方开奖结果体彩网:Capital expenditures represent the investments in buildings, machines, and equipment. It also uses working capital, which includes inventory, accounts receivablꦓe, and accounts payable.

Understanding Unlevered Free Cash Flow (UFCF)

Unlevered free cash flow is the gross free cash flow generated by a company. Unleve♒red free cash flow is the free cash flow available to pay all stakeholders in a firm, including debt holders as well as equity holders.

Leverage is another name for debt. 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 澳洲幸运5官方开奖结果体彩网:depreciation and 澳洲幸运5官方开奖结果体彩网:amortization, are added back♓ to earnings to arrive at th𒅌e firm's unlevered free cash flow.

A company with a sizeable outstanding debt (high leverage) is more likely to report unlevered free cash flow because it provides a rosier picture of the company's financial health.

The figure shows how assets are performing in a vacuum because it ignores the payments made for debt i✨ncurred to obtain those assets. Investors have to make sure to consider debt obligations since highly leveraged companies are at greater risk for bankruptcy.

Unlevered Free Cash Flow (UFCF) vs Levered F𒅌ree Cash Flow (꧙LFCF)

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. 

The difference between the levered an🎉d unlevereౠd free cash flow is also an important indicator. The difference shows how many financial obligations the business has and if the business is overextended or operating with a healthy amount of debt.

A business can have a negative levered free cash flow if its expenses are more than what the company earned. This is not an ideal situation, but as long as it's a temporary issue, investors should not be too rattled.

Limitations of Using Unlevered Free Cash♑ Flow (UFCF)

Companies looking to demonstrate better numbers can manipulate UFCF by laying off workers, delaying capital projects, liquida൩ting inventory, or delaying payments to suppliers.

All of these actions have consequences, so investors should diꦕscern whether improvements in unlevered free cash flow are transitory or genuinely convey improvements in the underlying business of the company.

Unlevered free cash flow is computed before interest payments, so viewing it in a bubble ignores the capital structure of a firm. After accounting for interest payments, a firm's LFCF may be negative. This may have negative implications down the road. Analysts should assess both unlevered and levered free cash flow over time for trends and not give too much weight to a single year.

The Bottom Line

Unlevered free cash flow examines a company's cash flow before considering its obligations. UFCF can be misleading to investors because it doesn't show how much cash flow is left after paying down debt. A company with a lot of debt would have a small cash flow, which UFCF would not indicate. Investors should look at levered and unlevered free cash flow to gain a better understanding of a company.