What Is Levered Free Cash Flow (LFCF)?

What Is Levered Free Cash Flow (LFCF)?

Let me explain what Levered Free Cash Flow, or LFCF, really means. It's the cash that's left over after a company has taken care of its financial obligations. This remaining money is key for things like paying dividends, putting funds back into the business, or even raising more capital. To calculate it, you subtract changes in net working capital, capital expenditures, and mandatory debt payments from EBITDA. If you grasp LFCF, you'll see how it guides strategic choices and shows a company's financial strength.

Key Takeaways on LFCF

Here's what you need to know about LFCF: it's the cash that remains after a company covers its debts and operational expenses. You can use it for dividends, reinvesting in the business, or buying back stock. Even if a company is doing well operationally, it might show negative LFCF due to big capital investments. On the flip side, positive LFCF makes the company look good to investors and lenders because it proves they can handle obligations and still generate cash. Remember, levered cash flow accounts for debt payments, unlike unlevered, which makes LFCF vital for checking real profitability.

How to Calculate Levered Free Cash Flow (LFCF)

Calculating LFCF is straightforward once you have the components. The formula is LFCF = EBITDA - ΔNWC - CapEx - D. Here, EBITDA stands for earnings before interest, taxes, depreciation, and amortization. ΔNWC is the change in net working capital, CapEx covers capital expenditures, and D is for mandatory debt payments. You plug in these values to get the levered free cash flow figure.

Insights From Levered Free Cash Flow Analysis

When you analyze LFCF, you're looking at a company's capacity to grow its business and reward shareholders through dividends or buybacks, all from operational cash. It also shows if the company can get more financing. If there's heavy debt and scant cash left, financing becomes tough. But with solid LFCF, it's a sign of low risk and appeal for investments or loans.

Negative LFCF isn't always a red flag; it could just mean the company invested heavily in capital that's not yet returning value. As long as they have enough cash to bridge the gap until flows improve, it's okay. What the company does with its LFCF matters too—maybe they pay dividends or invest in the business, or perhaps they pour it all into growth opportunities if management sees big potential.

Comparing Levered vs. Unlevered Free Cash Flow

Levered free cash flow is the cash a business has after settling debts and obligations. Unlevered free cash flow, or UFCF, is the cash before those debt payments, calculated as EBITDA minus CapEx minus working capital minus taxes. LFCF is what's available to pay shareholders, while UFCF covers both shareholders and debtholders. For investors, LFCF is the key number to watch—it's a stronger sign of the company's actual profitability.

How Is Levered Free Cash Flow (LFCF) Important to a Business?

LFCF is the cash a company can tap into for paying dividends and making business investments. It's central to how the company operates and grows.

How Does Levered Free Cash Flow Work?

LFCF measures how well a company can expand and return value to shareholders through operations-generated money, like dividends or buybacks. It also points to their ability to secure additional financing.

Which Is More Important to Investors: Levered or Unlevered Free Cash Flow?

Investors should focus more on levered free cash flow than unlevered. LFCF gives a clearer picture of the company's profitability.

Key Benefits of Levered Free Cash Flow

LFCF is the cash available after financial obligations are met, and it's essential for gauging a company's financial health. It lets firms pay dividends, repurchase shares, or reinvest in operations, making it a strong signal of profitability and smart capital use for investors. If LFCF is negative, it might just indicate investments that haven't paid off yet, but a positive figure shows low risk and good potential for borrowing or investing.