Unlevered Free Cash Flow - Explained
What is an Unlevered Free Cash Flow?
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Table of ContentsWhat is an Unlevered Free Cash Flow?How Does Unlevered Free Cash Flow Work?The Difference Between Levered and Unlevered Free Cash FlowLimitations of Unlevered Free Cash Flow
What is an Unlevered Free Cash Flow?
Unlevered free cash flow (UFCF) refers to the money available to a company without interest payments. It is the cash flow of a company based on the belief that the company owes no debt therefore has no interest payments to make. When filing the financial statement of a company, UFCF are also reported. This is the money that a company has before taking financial obligations. To calculate UFCF, the formula below will be used:
Unlevered free cash flow = EBITDA - CAPEX - Working Capital - Taxes
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How Does Unlevered Free Cash Flow Work?
The gross amount that a company generates in terms of free cash flow is estimated through UFCF. Unlevered free cash flow removes debt or financial leverage from the company's cash flow. It reveals the cash that is available to a company with which all expenses and capital expenditures are settled. Also, UFCF reveal the cash that a company needs to grow its assets and expand its business. When calculating the unlevered free cash flow of a business, depreciation and amortization of assets are aimed up and added to the earnings of the firm to give UFCF. Also, companies with huge debts but want to present themselves as healthy firms use UFCF. Here are some key points to know about unlevered free cash flow:
- Unlevered free cash flow is the cash flow available to a company before taking interest payment or financial leverage into account.
- The amount of money available to a business with which it runs is operations and expand its business is revealed through UFCF.
- Unlike UFCF, levered free cash flow takes into account interest payments that a company has to make and other financial obligations and leverages.
The Difference Between Levered and Unlevered Free Cash Flow
The major difference between levered free cash flow and unlevered free cash flow is that while levered free cash flow takes financial obligations that a compost has into account, UFCF gives no consideration to financial obligation. Levered free cash flow is the estimate of a company's cash flow after it has settled all debts and paid all expenses while unlevered free cash flow is the cash flow available to a company before making interest payments. Also, the number of financial obligations that a company has and the amount of debts is revealed through levered free cash flow.
Limitations of Unlevered Free Cash Flow
There are specific limitations of the unlevered free cash flow. The dominant limitations include the following;
- Companies with high debt profiles or those that are highly leveraged but want to present themselves in an appealing manner make use of UFCF.
- Unlevered free cash flow can be manipulated by companies.
- Delay of payments to suppliers, lay off employees, delay in capital intensive projects can be done by companies who use UFCF.
- Firms can convey improvements that are not genuine using UFCF.