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. LFCF is the amount of cash a company has after paying debts, while unlevered free cash flow (UFCF) is cash before debt payments are made. Levered free cash flow is important because it is the amount of cash that a company can use to pay dividends and make investments in the business.

Formula and Calculation of Levered Free Cash Flow

LFCF = EBITDA - change in NWC - CapEx - D
Levered Free Cash Flow (LFCF) Formula.  Investopedia

Where:

Key Takeaways

  • Levered free cash flow (LFCF) is the money left over after all a company's bills 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 pay dividends, buy back stock, or reinvest in the business.
  • Unlevered free cash flow (UFCF) is cash before debt payments are made.

What Levered Free Cash Flow (LFCF) Can Tell You

Levered free cash flow is a measure of a company's ability to expand its business and to pay returns to shareholders (dividends or buybacks) via the money generated through 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 low-risk borrower.

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 start paying off.

As long as the company is able to secure the necessary cash to survive until its cash flow increases 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 or for investment in the company. 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.

The Difference Between LFCF and Unlevered Free Cash Flow (UFCF)

Levered free cash flow is the amount of cash a business has after paying debts and other obligations. Unlevered free cash flow is the amount of cash a company has prior to paying its bills. UFCF is calculated as EBITDA minus CapEx minus working capital minus taxes.

LFCF is the cash flow available to pay shareholders, while UFCF is the money available to pay shareholders and debtholders. Levered free cash flow is considered the more important figure for investors to watch as it's a better indicator of a company's profitability.