Unlevered Free Cash Flow UFCF: Formula and Calculator

Unlevered Free Cash Flow is used in financial modeling to determine the enterprise value of a firm. It is technically the cash flow that equity holders and debt holders would have access to from business operations.

But, this may make equity holders a bit wary, as they would be the last to be paid in the event of bankruptcy. Free cash flow projection, which is the amount of cash a company’s business operations will produce after paying for capital expenditures and operating expenses. UFCF is the free cash flow that belongs to all the investors of a company, including debt holders as well as equity holders. Leverage is another term for the usage of debt, so levered cash flows mean that they are net of interest costs. Hence, using unlevered cash flows helps predict how much reliable cash flow can be expected to pay the debtholders.

Understanding Levered vs. Unlevered Free Cash Flow

Certain situations require adjustments to projection intervals to more accurately reflect the timing of UFCF. Additionally, using an annual projection interval may require a shorter stub period for the first interval (to reflect that a deal would close mid-year, for example). If we assume a tax rate of 26%, the tax expense is $65 million, which we’ll deduct from EBIT to calculate $185 million for NOPAT. Contrary to an unlevered DCF, the output of a levered DCF is the company’s equity value as opposed to the enterprise value. In this tutorial, you’ll learn why Unlevered Free Cash Flow is important, the items you should include and exclude, and how to calculate it for real companies in different industries.

The first step in calculating Unlevered Free Cashflow is to calculate NOPAT, or Net Operating Profit After Tax. This represents the net profit after stripping out the effect of interest payments. We start by taking EBIT, which represents the earnings before tax available to debt and equity holders. This tax calculation will often be higher than the tax expense in the Income Statement, as there are no interest payments to provide a tax shield.

Unlevered free cash flow vs. levered free cash flow

Unlevered free cash flow corresponds to enterprise value, i.e. the value of a company’s core operations to all capital providers. NOPAT is a company’s hypothetical after-tax operating income if its capital structure carried no debt at all. Unlevered free cash flow, or “UFCF”, represents the cash flow left over for all capital providers, such as debt, equity, and preferred stock investors. UFCF can be contrasted with levered cash flow , which is the money left over after all a firm’s bills are paid. After calculating NOPAT, the next step is to calculate the cashflow adjustments for non-cash charges and changes in operating assets and liabilities. These are the exact same adjustments you would calculate in the operating cashflows section when preparing a Statement of Cashflows. In our case, we have a complete Statement of Cashflows, so we can create these adjustments by linking to the relevant entries in the statement.

Also, note that the effects of taxes are not considered as part of EBITDA. The levered cash flow explains the cash flow situation of a business that carries out its operations through borrowings and thus attracts interest payments. As a result, the business will charge these payments on the cash flows generated from its business operations.

Unlevered Free Cash Flow Example Calculation

To determine the value of the business, the UFCF is generally discounted at the weighted average cost of capital. Unlevered free cash flow is an important metric for assessing a company’s financial health and its ability to generate cash flow. UFCF is calculated as net income plus depreciation and amortization minus capital expenditures.

UFCF is of interest to investors because it indicates how much cash a business has to expand. Adam Hayes, https://wave-accounting.net/ Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.