What is Unlevered Free Cash Flow?

Unlevered Free Cash Flow (UFCF) represents the cash a company generates before accounting for interest payments. It shows how much money is available to all investors—both equity holders and debt holders—after operational expenses and capital expenditures.

Unlike levered free cash flow, which factors in interest expenses, unlevered free cash flow provides a clear picture of a company's core financial performance, independent of its capital structure. This makes it especially useful for comparing companies with different levels of debt.

How to Calculate It

To calculate unlevered free cash flow, you begin with EBIT (Earnings Before Interest and Taxes), subtract taxes, and then adjust for non-cash expenses, changes in working capital, and capital expenditures.

The formula is:

UFCF = EBIT × (1 - Tax Rate) + Depreciation & Amortization - Changes in Working Capital - Capital Expenditures

For example, if a company has an EBIT of $500,000, a tax rate of 30%, depreciation of $50,000, capital expenditures of $70,000, and an increase in working capital of $20,000, the UFCF would be:

UFCF = 500,000 × (1 - 0.30) + 50,000 - 20,000 - 70,000 = 350,000 + 50,000 - 20,000 - 70,000 = $310,000

Why Use It

Unlevered free cash flow is a key metric for evaluating a company's financial flexibility. It helps investors and analysts understand how much cash a company can generate regardless of its financing choices. This makes it highly relevant for mergers, acquisitions, and valuation models like DCF (Discounted Cash Flow).

Since it excludes interest payments, UFCF is considered more objective when comparing companies in the same industry but with different debt levels. It reflects the company’s true operating performance and potential for generating returns.

Interpreting It

A positive unlevered free cash flow indicates that a company generates more cash than it spends on operating and capital needs, leaving surplus funds for investors. This is often a sign of a healthy and efficient business.

Negative UFCF, however, doesn’t always signal trouble. It might reflect temporary investments in growth, such as infrastructure or product development. Analysts must consider the company’s growth stage and strategy before making conclusions.

Practical Applications

UFCF is widely used in business valuation. It is the foundation of the DCF model, where future unlevered cash flows are forecasted and discounted to determine the intrinsic value of a business. This helps investors decide whether a stock is over- or under-valued.

It’s also useful in strategic planning and budgeting. CFOs and finance teams use UFCF to evaluate whether the business is generating enough cash to fund expansion, pay dividends, or reduce debt—without relying on external financing.

Conclusion

Unlevered free cash flow is a crucial metric for understanding a company's operational efficiency and value generation. By excluding the effects of debt and interest payments, it offers a neutral view of a company's ability to produce cash from its core business activities.

Whether you're an investor, analyst, or executive, UFCF provides meaningful insight into financial health and long-term sustainability. It helps in making informed decisions about valuation, investment, and strategy.