Levered Free Cash Flow

What is 'Levered Free Cash Flow'

Levered free cash flow is the free cash flow that remains after a company has paid its obligations on its debt. The levered cash flow represents the amount of cash left over for stockholders and for investment after all obligations are covered. The levered cash flow can be negative while the operating cash flow is positive if the amount of cash paid to cover obligations exceeds the cash that comes from operations.

BREAKING DOWN 'Levered Free Cash Flow'

A company’s levered free cash flow is a signal of what a company has on hand to use for expansion. A company with a small amount of cash left on hand will have a more difficult time finding funds to pay for its expansion. If the company already has significant amount of debt relative to cash flows it may not be able to sustain further debt levels, since so much of its cash flow is already going toward debt repayment.

If a company does not have much debt it may be able to increase borrowing in order to finance growth. If the company is able to increase cash flows through the debt financing of new assets, it can see an increase in the levered free cash flow, but if it is unable to offset the increase in debt payments by an increase in cash it will wind up with a small or negative levered free cash flow. While stockholders appreciate company growth and will tolerate a certain level of debt, they also expect dividends when a company does have cash remaining on hand.

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RELATED FAQS
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