How to Calculate Unlevered Free Cash Flow (UFCF)

Unlevered Free Cash Flow (UFCF) is a financial metric representing the cash a company generates from its core operations. It shows the cash available to all capital providers, including debt holders and equity investors, before considering any debt payments or the impact of its capital structure. UFCF helps assess a company’s financial strength independently of its financing choices.

Fundamentals of Unlevered Free Cash Flow

UFCF represents the cash a company generates from its business activities before payments to lenders or shareholders. By excluding the effects of debt and interest, UFCF allows for a clearer comparison between companies with different financing arrangements, providing a direct view of their core business performance.

The calculation of UFCF begins with a company’s operating profits (EBIT), adjusted for taxes as if the company had no debt. This adjusted profit is Net Operating Profit After Taxes (NOPAT). Non-cash expenses, such as depreciation and amortization, are then added back to NOPAT because they reduce reported profit but do not involve a cash outflow.

From this operational cash, investments to maintain and grow the business are deducted. Capital expenditures (CapEx), funds spent on acquiring or upgrading long-term assets like property, plant, and equipment, are subtracted. Finally, changes in working capital are accounted for, reflecting cash tied up or released from short-term operational assets and liabilities, such as inventory, accounts receivable, and accounts payable. An increase in working capital consumes cash, while a decrease releases it.

Identifying Necessary Financial Data

Calculating Unlevered Free Cash Flow requires specific financial data from a company’s Income Statement, Balance Sheet, and Cash Flow Statement. The Income Statement provides details on a company’s revenues and expenses, allowing for the determination of operating income and tax expenses. The Balance Sheet presents a snapshot of assets, liabilities, and equity at a specific point in time, essential for calculating changes in working capital and identifying long-term assets. The Cash Flow Statement details cash inflows and outflows from operating, investing, and financing activities.

You will need the company’s Operating Income (EBIT) from the Income Statement. For tax adjustments, the effective tax rate is needed; this can be derived from the Income Statement by dividing the income tax expense by earnings before taxes. Depreciation and Amortization, a non-cash expense, can be found on the Income Statement or Cash Flow Statement.

Capital Expenditures (CapEx) are found under the “Investing Activities” section of the Cash Flow Statement. Changes in Working Capital, reflecting the net change in current operational assets minus current operational liabilities, are found within the operating activities section of the Cash Flow Statement.

Performing the Unlevered Free Cash Flow Calculation

The calculation of Unlevered Free Cash Flow combines data from various financial statements. The formula for UFCF starts with Net Operating Profit After Taxes (NOPAT), then adjusts for non-cash expenses, capital expenditures, and changes in working capital. NOPAT is calculated by taking a company’s Operating Income and multiplying it by one minus its effective tax rate. This adjustment removes the impact of interest expense on taxes, providing a cleaner view of operational profitability.

Consider “Example Corp.” to illustrate the calculation.

Example Corp. – Income Statement (Partial, Year Ended December 31, 2024)
Revenue: $1,000,000
Operating Expenses (excluding D&A): $600,000
Depreciation & Amortization: $50,000
Operating Income (EBIT): $350,000
Interest Expense: $20,000
Earnings Before Tax: $330,000
Income Tax Expense (assuming 21% effective tax rate): $69,300
Net Income: $260,700

Example Corp. – Balance Sheet (Partial, as of December 31)
| Account | 2023 | 2024 |
| :———————– | :—— | :—— |
| Accounts Receivable | $80,000 | $95,000 |
| Inventory | $60,000 | $70,000 |
| Accounts Payable | $45,000 | $55,000 |
| Property, Plant & Equipment (Net) | $300,000 | $380,000 |

Step 1: Calculate Net Operating Profit After Taxes (NOPAT)

NOPAT represents the company’s operating profit if it had no debt, adjusted for taxes. Using Example Corp.’s Operating Income of $350,000 and an effective tax rate of 21%:
NOPAT = Operating Income × (1 – Tax Rate)
NOPAT = $350,000 × (1 – 0.21)
NOPAT = $350,000 × 0.79
NOPAT = $276,500

Step 2: Add Back Depreciation and Amortization (D&A)

Depreciation and amortization are non-cash expenses, meaning they reduce reported profit but do not involve an actual cash outflow. Example Corp.’s Depreciation & Amortization is $50,000.

Step 3: Subtract Capital Expenditures (CapEx)

Capital expenditures are cash outflows for investments in long-term assets. CapEx is calculated from the change in Property, Plant, and Equipment (PP&E) on the Balance Sheet, adding back depreciation:
CapEx = (Ending PP&E – Beginning PP&E) + Depreciation
CapEx = ($380,000 – $300,000) + $50,000
CapEx = $80,000 + $50,000
CapEx = $130,000

Step 4: Adjust for Changes in Net Working Capital (NWC)

Changes in working capital reflect how much cash is tied up in or released from short-term operational assets and liabilities. NWC is calculated as current operational assets minus current operational liabilities. An increase in NWC is subtracted in the UFCF calculation, and a decrease is added.

First, calculate NWC for each year:
NWC 2023 = Accounts Receivable 2023 + Inventory 2023 – Accounts Payable 2023
NWC 2023 = $80,000 + $60,000 – $45,000 = $95,000
NWC 2024 = Accounts Receivable 2024 + Inventory 2024 – Accounts Payable 2024
NWC 2024 = $95,000 + $70,000 – $55,000 = $110,000

Next, calculate the Change in NWC:
Change in NWC = NWC 2024 – NWC 2023
Change in NWC = $110,000 – $95,000
Change in NWC = $15,000 (This is an increase, so it will be subtracted.)

Step 5: Calculate Unlevered Free Cash Flow (UFCF)

Combine all the calculated components:
UFCF = NOPAT + Depreciation & Amortization – Capital Expenditures – Change in Net Working Capital
UFCF = $276,500 + $50,000 – $130,000 – $15,000
UFCF = $181,500

Example Corp.’s Unlevered Free Cash Flow for 2024 is $181,500.

Understanding Your Calculated UFCF

Once calculated, UFCF signifies the cash generated by a company’s operations that is available to all its capital providers. It provides a clear view of a company’s ability to generate cash independently of its financing structure. A positive UFCF indicates the company generates more cash than it consumes, suggesting financial health and growth potential.

UFCF is applied in valuation methodologies, particularly Discounted Cash Flow (DCF) analysis. In a DCF model, future UFCF projections are discounted to their present value to estimate a company’s intrinsic value. This approach removes distortions from varying debt levels, allowing for objective comparison.

A negative UFCF indicates a company consumes cash rather than generating it from operations and investments. This may arise from capital expenditures for growth or signal operational challenges. While a single period of negative UFCF might not be a concern, a sustained pattern could indicate financial strain. Interpret UFCF considering the company’s industry, growth stage, and strategic objectives.