What is Unlevered Free Cash Flow (UFCF)?

Unlevered Free Cash Flow (UFCF) is the cash flow available to all investors (both debt and equity holders) before accounting for interest expenses and debt repayments. It represents the amount of cash a company generates from its operations, assuming it has no debt.

Formula for UFCF:

Breakdown of Components:

• EBIT (Earnings Before Interest and Taxes): Measures operating profitability before financing costs.
• Tax Rate: Applied to EBIT to determine after-tax earnings.
• Depreciation & Amortization (D&A): Non-cash expenses added back since they reduce accounting profits but do not impact cash flow.
• Capital Expenditures (CapEx): Funds used for purchasing or upgrading physical assets like buildings, equipment, or technology.
• Change in Net Working Capital (NWC): Measures changes in current assets (excluding cash) and current liabilities. An increase in NWC means more cash is tied up in operations, reducing UFCF.

Why is UFCF Important?

1. Valuation (DCF Analysis): Used in Discounted Cash Flow (DCF) models to estimate a company’s intrinsic value.
2. Debt-Free Cash Flow Perspective: Allows investors to compare companies without the distortion of different capital structures.
3. Investor Decision-Making: Helps equity investors, lenders, and acquirers assess cash generation potential.
4. M&A Analysis: Commonly used to evaluate acquisition targets.

Difference Between UFCF and Levered Free Cash Flow (LFCF):

• UFCF does not include interest payments or debt repayments.
• LFCF (Free Cash Flow to Equity, or FCFE) includes debt obligations and represents cash available to equity holders after interest and principal payments.