Levered Free Cash Flow (LFCF): What Is It?
The amount left over after a corporation pays off its debt is known as levered free cash flow, or LFCF. Levered free cash flow (LFCF) is a company’s cash after debt payments are made; unlevered free cash flow (UFCF) is its cash before debt payments. Because it represents the money available for dividend payments and business investments, levered free cash flow is significant.
Formula and Leveraged Free Cash Flow Calculation
LFCF=EBITDA-ΔNCW-CapEx-D
Where
Profits before interest, taxes, depreciation, and amortization are EBITDA.
NWC stands for net working capital change.
CapEx stands for capital outlays.
D = Compulsory loan payments
What You Can Learn From Levered Free Cash Flow (LFCF)
Levered free cash flow is a metric used to assess a company’s capacity to grow and distribute profits (in the form of dividends or buybacks) to shareholders using funds generated by operations. It could also serve as a gauge of a business’s potential to raise more money through financing.
If a business already has a large debt load and little cash left over after payments are made, getting more funding from a lender could be challenging. But a business with a sizable quantity of levered free cash flow becomes a low-risk borrower and a more appealing investment.
Levered free cash flow does not always mean a business fails, even if it is hostile. The business may have made substantial capital expenditures that are still paying off.
It is feasible and acceptable for the company to have a brief period of negative levered free cash flow as long as it can obtain the funds required to continue operating until its cash flow increases.
Investors also pay attention to what a company does with its leveraged free cash flow. A corporation can use a sizable portion of its levered free cash flow for investments in the business or dividend payments. On the other hand, the firm’s management may decide to allocate almost all its levered free cash flow to prospective growth if it sees a significant possibility for growth and market expansion.
Levered versus Unlevered Free Cash Flow (UFCF vs. LFCF)
A company’s levered free cash flow is its remaining cash after all bills and other commitments have been paid. Unlevered free cash flow is the cash a business has left over after paying its debt. EBITDA less CapEx less working capital less taxes equals UFCF.
The cash flow available to pay debt holders and shareholders is known as UFCF, whereas the cash flow available to pay shareholders is known as LFCF. Since levered free cash flow is a more accurate measure of a company’s profitability, it is considered the more significant metric for investors to monitor.
Conclusion
- LFCF stands for “levered free cash flow.” This is the money a business has left over after paying all its bills.
- If a company has a positive working cash flow, it doesn’t mean its free cash flow is positive.
- It’s up to the company to decide whether to pay bonuses, buy back stock, or put the money back into the business.
- You have unlevered free cash flow (UFCF) when you don’t owe any money.
