What is Levered Free Cash Flow (LFCF)?
Levered free cash flow (LFCF) is the amount of money a company has left remaining after paying all of its financial obligations. Levered free cash flow is important to both investors and company management, because it is the amount of cash that a company can use to pay dividends to shareholders and/or to make further investments in growing the company's business. The amount of levered cash flow a company has can be negative even though operating cash flow is positive. This occurs when the amount of operating cash flow a company generates is insufficient to cover all of the financial obligations.
Understanding Levered Free Cash Flow
Levered free cash flow is a measure of a company's ability to expand its business and to pay returns to shareholders using only the money generated through current operations. It may also be used as an indicator of a company's ability to obtain additional capital through financing. If a company already has a significant amount of debt, and has little in the way of a cash cushion after meeting its obligations, it may be difficult for the company to obtain additional financing from a lender. If, however, a company has a healthy amount of levered free cash flow, it then becomes a more attractive investment and a a low risk borrower from the perspective of lenders.
Levered free cash flow is the opposite of unlevered free cash flow (UFCF), which is the amount of cash a company has prior to paying its bills, such as operating expenses and debt payments. Both figures may appear in a company's cash flow report, but levered free cash flow is considered the more important figure for investors to watch, since it is a better indicator of the actual level of a company's profitability.
- Levered free cash flow is the money that is left over when all the bills from a company's operations are paid.
- A company can have a negative levered free cash flow even if operating cash flow is positive.
- A company may choose to use its levered free cash flow to increase dividends to investors, buy back stock or reinvest in the growth of the business.
Using Levered Free Cash Flow in Stock Analysis
Even if a company's levered free cash flow is negative, it does not necessarily indicate that the company is failing. It may be the case that the company has made substantial capital investments that have yet to begin paying off at the level the company expects. As long as the company is able to secure the necessary cash to survive until its cash flow increases due to increased revenues, then a temporary period of negative levered free cash flow is both survivable and acceptable.
What a company chooses to do with its levered free cash flow is also important to investors. A company may choose to devote a substantial amount of its levered free cash flow to dividend payments for shareholders, either because it hopes to attract more investors by offering a higher dividend yield or simply because its management does not believe that, at the time, the cash can better be utilized for investment in company growth. If, on the other hand, the company's management perceives an important opportunity for growth and market expansion, it may choose to devote nearly all of its levered free cash flow to funding potential growth.