What Is Unlevered Free Cash Flow (UFCF)?
Let me explain unlevered free cash flow, or UFCF, directly to you. It's the cash flow a company generates before you factor in any interest payments on debt. This metric tells you how much cash the business has on hand before dealing with financial obligations, and you can find it on financial statements or calculate it yourself as an analyst. UFCF stands in contrast to levered free cash flow (LFCF), which is what's left after paying all bills. As an investor, you should pay attention to UFCF because it shows the cash available for growth or distribution to all stakeholders.
The Formula for UFCF
Here's the straightforward formula I use for UFCF: it's EBITDA minus CAPEX minus changes in working capital minus taxes. EBITDA is earnings before interest, taxes, depreciation, and amortization, CAPEX covers investments in assets like buildings or equipment, working capital involves inventory, receivables, and payables, and taxes are what they sound like. You won't see UFCF listed explicitly on statements, but you can pull the numbers from the income statement and balance sheet to compute it yourself.
Understanding UFCF
When I look at UFCF, I see it as the gross free cash flow a company produces, available to both debt and equity holders. Leverage means debt, so unlevered ignores those costs—it's net of CAPEX and working capital needs that keep the business running and growing. We add back non-cash items like depreciation to earnings to get this figure. Companies with high debt often highlight UFCF because it paints a better picture without showing debt burdens, but you need to remember that ignoring debt can hide bankruptcy risks.
UFCF vs. LFCF
Let me compare UFCF and LFCF for you. UFCF is before financing costs, while LFCF is after paying interest, loans, and other obligations—it's the cash truly left over. The gap between them reveals if a company is overleveraged or managing debt well. A negative LFCF isn't always disastrous if it's temporary, but it signals potential issues. In cash flow statements, financing activities show these flows, including debt and dividends.
Limitations of UFCF
UFCF has its downsides, and I'll tell you straight: companies can boost it artificially by cutting staff, delaying projects, selling inventory, or holding off supplier payments, but these moves can hurt long-term. It ignores capital structure, so a positive UFCF might hide negative LFCF after debt payments. You should review both metrics over time for trends, not just one year, to get the real story.
Frequently Asked Questions
- How do you calculate UFCF from net income? Start with net income, add back depreciation and amortization, subtract changes in working capital and CAPEX, then add back interest to make it unlevered.
- Why is UFCF preferred in DCF analysis? It gives a cleaner view of enterprise value without debt costs, making comparisons across companies easier.
- Why don't you deduct interest in UFCF? Unlevered means excluding leverage effects, so interest is ignored to focus on operational cash.
- What is UFCF margin? It's UFCF as a percentage of sales, showing cash availability before financing relative to revenue.
The Bottom Line
In summary, UFCF looks at cash before obligations, but it can mislead by not showing debt impacts—a high-debt company might have little actual cash left. I recommend you examine both UFCF and LFCF to fully understand a company's financial position.
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