Cash Flow Management
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Unlevered vs. Levered Free Cash Flow: Key Differences
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Free cash flow is one of the most important numbers in finance—it shows how much cash a business actually has after covering its expenses.
But not all free cash flow is the same.
You’ll often hear about unlevered and levered free cash flow, especially when evaluating a company’s financial strength.
If these terms sound complicated, don’t worry.
Understanding them can give you a clearer picture of a business’s real financial health and its ability to grow, pay off debt, or return money to investors.
In this article, we’ll break it all down in simple terms. Let’s get started!
What is Unlevered Cash Flow
Unlevered free cash flow (UFCF) is the total cash a company generates from its operations before accounting for debt payments. It represents the company’s ability to produce cash purely from its business activities, without considering financial obligations like loan repayments or interest expenses.
Since it removes the impact of debt, UFCF gives a clearer picture of a company’s operational strength and overall profitability, making it a key metric for investors and analysts when valuing a business.
Because UFCF ignores financing decisions, it’s often used to compare companies more fairly, especially those with different levels of debt.
It also plays a major role in financial models like discounted cash flow (DCF) analysis, where investors estimate a company’s future value.
What is Levered Free Cash Flow?
Levered free cash flow (LFCF) is the cash a company has left after paying its debts, including loan repayments and interest expenses. It shows how much cash is actually available for shareholders, reinvestment, or dividends once all financial obligations have been met.
Since it accounts for debt, LFCF provides a realistic picture of how much money a company can freely use without risking its financial stability.
Lenders and investors pay close attention to LFCF because it reveals whether a company is generating enough cash to cover its debts and still have money left over. If a company has low or negative LFCF, it may struggle with financial obligations, while strong LFCF suggests healthy cash management.
This metric is especially important for businesses with high borrowing since it directly reflects their ability to handle financial commitments.
Key Differences Summarized
| Feature | Unlevered Free Cash Flow (UFCF) | Levered Free Cash Flow (LFCF) |
|---|---|---|
| Definition | Cash flow available before paying debt | Cash flow left after paying debt |
| Debt Payments | Not deducted | Deducted |
| Who Uses It? | Investors, analysts, company valuation | Lenders, investors checking financial risk |
| Shows | A company’s overall cash-generating ability | How much cash is left for shareholders |
| Better For? | Valuing a business as a whole | Understanding available cash for dividends or reinvestment |
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