Levered Free Cash Flow (LFCF)

Levered Free Cash Flow (LFCF)

Levered Free Cash Flow (LFCF) is the cash a company has left after meeting all operating expenses and mandatory financial obligations, including debt repayments. It represents the cash available to equity holders for dividends, share repurchases, or reinvestment in the business, and is a direct indicator of a company’s ability to service debt and return capital.

Key takeaways

• LFCF measures cash available to equity holders after debt payments.
• Positive LFCF suggests capacity to pay dividends, buy back shares, or invest in growth.
• Negative LFCF can result from heavy capital spending or large mandatory debt repayments and isn’t always a sign of failure.
• LFCF differs from unlevered free cash flow (UFCF), which excludes debt payments and shows cash available to both debt and equity holders.

How to calculate LFCF

A common formulation is:
LFCF = EBITDA − ΔNWC − CapEx − Mandatory debt repayments

Where:
* EBITDA = Earnings before interest, taxes, depreciation, and amortization
ΔNWC = Change in net working capital (current assets minus current liabilities)
CapEx = Capital expenditures (investments in property, plant, equipment, etc.)
* Mandatory debt repayments = Scheduled principal repayments and other required debt servicing

A simpler cash-flow–based equivalent is:
LFCF = Cash from operating activities − CapEx − Mandatory debt repayments

Interpretation and uses

• Investment decisions: Investors use LFCF to evaluate whether a company can sustainably pay dividends or perform buybacks.
• Financing and creditworthiness: Lenders and credit analysts view healthy LFCF as a sign the company can meet debt obligations and is a lower credit risk.
• Growth assessment: Management may allocate LFCF to reinvestment when pursuing growth opportunities; sustained negative LFCF may reflect aggressive expansion or major capital projects.
• Valuation: LFCF helps equity holders assess potential returns, while unlevered cash flow (UFCF) is typically used for enterprise-value DCF models.

Levered vs. unlevered free cash flow

• Levered Free Cash Flow (LFCF): After debt payments — cash available to equity holders.
• Unlevered Free Cash Flow (UFCF / FCFF): Before debt payments — cash available to all capital providers (debt and equity). UFCF is useful for comparing firms with different capital structures and for enterprise valuation; LFCF shows the actual cash left for shareholders after financial obligations.

Limitations and caveats

• Timing and one-off items: LFCF can be volatile due to timing differences in working capital, one-time asset sales, or irregular debt repayments.
• Capital intensity: Capital-intensive businesses may show negative LFCF during growth phases despite strong underlying economics.
• Accounting differences: Definitions and line-item treatments vary across financial statements; always verify the components used in a specific calculation.

Practical takeaway

LFCF is a practical measure of the cash equity holders can expect after mandatory debt servicing. Use it alongside profitability metrics, leverage ratios, and cash-flow trends to assess financial health, dividend sustainability, and financing flexibility.