Unlevered Free Cash Flow (UFCF)

Key takeaways
* Unlevered free cash flow (UFCF) is the cash a company generates before accounting for interest and other financing costs.
* UFCF shows cash available to all capital providers (debt and equity) and is commonly used to value enterprise value (EV) in discounted cash flow (DCF) analysis.
* Compare UFCF with levered free cash flow (LFCF) — LFCF reflects cash after financing costs — and review both over time to get a full picture of financial health.
* UFCF can be improved temporarily by operational changes (layoffs, delaying capex, etc.), so check for sustainability.

What is UFCF?

UFCF is the company’s free cash flow measured as if the firm had no debt. It excludes interest and other financing expenses, focusing on cash generated by the business’s operations and necessary reinvestment to maintain and grow the asset base.

Common formula

A straightforward way to express UFCF:

UFCF = EBITDA − Capital Expenditures (CapEx) − Change in Working Capital − Taxes

Notes:
* EBITDA includes earnings before interest, taxes, depreciation and amortization.
* Working capital typically reflects changes in inventory, accounts receivable, and accounts payable.
* Non-cash charges such as depreciation and amortization are added back (that’s why EBITDA is often used).

Calculating UFCF from net income

If you start with net income, compute free cash flow and then remove financing effects:

1. FCF = Net income + Depreciation & Amortization − Change in Working Capital − Capital Expenditures
2. To arrive at UFCF, add back interest expense (or other financing cash flows) that were subtracted in arriving at net income. This removes the effect of capital structure.

Why UFCF is used in DCF and valuation

• UFCF is capital-structure-neutral, so it provides a consistent basis to value enterprise value (EV) across companies with different debt levels.
• Because UFCF excludes financing costs, it allows DCF comparisons without embedding a specific mix of debt and equity in cash flows; financing is handled separately via discount rates or terminal adjustments.

UFCF vs. Levered Free Cash Flow (LFCF)

• UFCF: cash available before interest — available to both debt and equity holders.
• LFCF: cash remaining after interest and other financing payments — available only to equity holders.
• The gap between UFCF and LFCF reveals how much financing expense affects cash available to equity and signals the degree of leverage.

Limitations and cautions

• UFCF can give an overly optimistic view if a firm has significant debt, since it ignores interest obligations that may materially affect viability.
• Companies can temporarily boost UFCF by cutting investment or delaying payments; always evaluate whether improvements are sustainable.
• Interest timing differences (accrued vs. paid) and one-time items can distort year-to-year comparisons; examine multiple periods and both UFCF and LFCF trends.

UFCF margin

UFCF margin = UFCF ÷ Revenue.
This ratio shows how much pre-financing cash flow the business generates per dollar of sales and aids comparisons across companies and over time.

Conclusion

UFCF is a useful measure for assessing operating cash generation independent of capital structure, making it a preferred input for enterprise valuation and DCF analyses. However, it should be used alongside levered measures and with attention to sustainability and financing obligations to avoid misleading conclusions.