Unlevered Free Cash Flow (UFCF)

If you’re looking to gain a strong understanding of your company’s financial position, cash flow is probably the most important metric to start with.

The problem is, financial experts use a number of different terms and formulas to analyze different kinds of cash flow, which makes things a little more complicated.

One such term you might hear thrown about is unlevered free cash flow, which is the financial metric we’re going to be looking at today.

Here’s what we’ll cover, so you can use unlevered free cash flow better understand your company’s financial performance:

• What unlevered free cash flow is
• How it differs from levered free cash flow
• How to calculate it + an example
• The importance of unlevered free cash flow in financial analysis

What is Unlevered Free Cash Flow?

Unlevered free cash flow (UFCF) is a measurement of a company’s available cash before considering mandatory debt payments such as interest or loan repayments.

It is a metric that you’ll sometimes see pop up in a company’s financial statements, but it is not a requirement, and it all depends on how the business wishes to present its performance to stakeholders (more on that later).

Unlevered free cash flow basically answers the question:

Assuming we didn’t have to pay down any debts, how much cash do we have left over for the period in question?

Of course, you probably do have debts to pay, which is why UFCF comes with a twin brother: levered free cash flow.

Unlevered vs. Levered Free Cash Flow

Levered free cash flow is the same calculation but also considers mandatory financial obligations.

So, it’s the amount of cash a business has left over after paying for everything it actually has to.

For that reason, it’s generally a more useful metric for assessing a single company’s financial position.

That’s because UFCF is an exaggerated account of the cash you have available; it’s not as if you can actually not pay those debts (that’s why they are called mandatory).

Still, some companies report UFCF in their financial statements because it provides a more attractive picture to lenders and potential investors—though the more savvy among them will be able to calculate levered free cash flow pretty easily anyway.

Where unlevered free cash flow does come in handy is when comparing two businesses side by side that have different capital structures.

If one is bootstrapped and the other is highly leveraged with debt equity, UFCF levels the playing field and allows investors to compare the companies on a cash basis.

Okay, back to unlevered free cash flow.

How To Calculate Unlevered Free Cash Flow

As mentioned before, unlevered free cash flow isn’t always included in financial filings, and it’s definitely not something you’ll find as standard in the big three financial reports.

However, the data you need to calculate it can be, so here’s what you’ll need to pull out in order to run the UFCF formula:

• EBITDA (earnings before interest, taxes, depreciation, and amortization): an alternative to net income that finance leaders use to determine general financial performance
• CAPEX (capital expenditures): investments in plant, property, equipment, machinery, equipment, and so on
• Change in working capital: adjustments to the total amount of working capital available

From there, you’re unlevered free cash flow formula is:

Unlevered Free Cash Flow = EBITDA – CAPEX – change in net working capital

To really understand how this works in process, you might find it helpful to look at an example.

Unlevered Free Cash Flow Example

Imagine you own an online jewelry store that you started three years ago.

You opened the business with $50,000 of your own money, plus a loan of $100,000, giving you $150,000 to kick things off.

Things have been going well, with consistent EBITDA growth. In the first year, you made $80,000, $120,000 in the second, and $2050,000 in year three.

You’ve been able to consistently scale capital expenditure too. You spent $75,000, $100,000, and $125,000 for the three years, respectively.

Working capital across the three years of business looked like this:

Year 1: $25,000

Year 2: $50,000

Year 3: $75,000

When calculating unlevered free cash flow, we want to start by pulling together the figures we need:

	Year 1	Year 2	Year 3
EBITDA	$80,000	$120,000	$250,000
CAPEX	$75,000	$100,000	$125,000
Working Capital	$25,000	$50,000	$75,000

Remember that our UFCF is to take EBITDA and then subtract the remaining two figures:

UFCF = EBITDA – CAPEX – change in net working capital

Here’s what that looks like across our three years:

• UFCF = $80,000 – $75,000 – $25,000 = -$20,000
• UFCF = $120,000 – $100,000 – $50,000 = -$30,000
• UFCF = $250,000 – $125,000 – $75,000  = $50,000

The Importance Of The UFCF Metric

So, you’ve calculated UFCF.

What do you do with this metric?

Well, as a standalone metric, it’s helpful for benchmarking against other companies that might have a different capital structure from yours.

If one business is bootstrapped and the other has a tonne of debt, then you can use UFCF to compare free cash flow, something that doesn’t stack up when comparing on the basis of levered free cash flow.

That’s about it, as far as an “in a vacuum” analysis of UFCF goes.

What we’d recommend is that you also go ahead and calculate levered free cash flow, which essentially just means taking your UFCF and subtracting mandatory debt repayments.

For a start, this gives you a more realistic view of your financial health from a free cash perspective.

Then, you want to start digging a little deeper.

Your first stop should be to spot whether free cash flow (levered or unleveled) is positive or negative.

Positive cash flow is, in the majority of cases, a good thing. The exception being a scenario in which cash flow is positive only because company management has failed to invest adequately in capital expenditures, which could spell trouble in the future.

Other than that, being cash flow positive is a good thing. But that doesn’t mean that negative cash flow is a bad thing, not exactly.

Let’s say your unlevered free cash flow for the period came out negative.

But, when you dive into the components of your UFCF formula, you see that the cause of this negative cash flow is a huge investment in capital expenditure: you just bought a whole lot of new plant, machinery, and equipment.

This is a good investment in the future of the company (presumably), which means it’s not really a bad thing that your UFCF was negative for that period.

If, viewing your unlevered free cash flow trend over time (generally a good practice), you see that EBITDA is growing steadily and this negative calculation is the result of one-off large capital investment, you’re probably in the clear.

Ready to Track Unlevered Free Cash Flow?

Understanding how to calculate, interpret, and analyze unlevered free cash flow is critical for anyone looking to improve visibility, maximize company financial performance, and drive new growth strategies.

As a financial expert, though, the value you provide isn’t wading through statements, spreadsheets, and calculations: it’s in the analysis of figures and the provision of strategic plans.

Save yourself all the time and headache pulling numbers from various spreadsheets and software tools, and plugging them into your UFCF formula.

With Finmark from BILL, you can set up a custom formula to track UFCF as part of a fully customized financial reporting dashboard.

Connect Finmark with your existing finance and accounting tools, then pull data in automatically to create instant reports, free up time for strategic analysis and planning.

Dive in today with a free 30-day trial of Finmark, the financial modeling and planning platform for startups and SMBs.