

Unlevered Free Cash Flow

Used in financial modeling to value a firm

What is unlevered free cash flow?

Unlevered Free Cash Flow (also known as Free Cash Flow to the Firm or FCFF for short) is a theoretical cash flow figure for a business. It is the cash flow available to all equity holders and debtholders after all operating expenses, capital expenditures, and investments in working capital have been made. Unlevered Free Cash Flow is used in financial modeling to determine the enterprise value of a firm. It is technically the cash flow that equity holders and debt holders would have access to from business operations.


Unlevered free cash flow formula?

The formula is:

Unlevered free cash flow = EBIT – Taxes + Depreciation & Amortization – Capital Expenditures – increases in non-cash working capital

unlevered free cash flow formula


Why is unlevered free cash flow used?

Unlevered free cash flow is used to remove the impact of capital structure on a firm’s value and to make companies more comparable. Its principal application is in valuation, where a discounted cash flow (DCF) model is built to determine the net present value (NPV) of a business. By using unlevered cash flow, the enterprise value is determined, which can easily be compared to the enterprise value of another business.


Why is capital structure ignored?

There are two main reasons capital structure is ignored when performing a valuation:

  1. It makes firms comparable
  2. Capital structure is somewhat discretionary, and owners/managers could theoretically place a different capital structure of their choosing on the firm

Let’s explore each of these ideas in more detail below.

Comparability. Since some companies have a high interest expense, while others have little to no interest expense, the levered cash flow of two firms can be skewed by the impact of interest. By removing the interest expense and recalculating taxes, it’s much easier to make an apples to apples comparison.

Discretionary. This point is somewhat theoretical, as firms may be limited in how much flexibility they have, but in theory, the owners or managers of the business can put whatever capital structure they want on the business.


How to calculate free cash flow to the firm

Here is a step-by-step example of how to calculate unlevered free cash flow (free cash flow to the firm):

  1. Begin with EBIT (Earnings Before Interest and Tax)
  2. Calculate the theoretical taxes the company would have to pay if they didn’t have a tax shield (i.e., without deducting interest expense)
  3. Subtract the new tax figure from EBIT
  4. Add back depreciation and amortization expenses
  5. Subtract any increases in non-cash net working capital
  6. Subtract any capital expenditures


Unlevered Free Cash Flow example


This is the most common cash flow metric used for any type of financial modeling valuation.

As you can see in the example above and the section highlighted in gold, EBIT of $6,800, less taxes of $1,360 (without deducting interest), plus depreciation and amortization of $400, less an increase in non-cash working capital of $14,000, less capital expenditures of $40,400, results in unlevered free cash flow of -$48,560.


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Unlevered Free Cash Flow Template

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Arriving at equity value

When using unlevered free cash flow to determine the Enterprise Value (EV) of the business, a few simple steps can be taken to arrive at the equity value of the firm.

To arrive at equity value, take the following steps:

  1. Add the cash balance
  2. Subtract any debt
  3. Subtract any minority interest

To learn more, see our guide on equity value vs enterprise value.


Video explanation

Below is a video explanation of how this works.


Additional resources

This has been a guide to unlevered free cash flow and free cash flow to the firm (FCFF).  The best way to completely understand this metric is through practicing financial modeling and building the calculation yourself in Excel from scratch.


Additionally, these free CFI resources may be a big help to you:

  • The ultimate cash flow guide (EBITDA vs Operating Cash Flow vs Free Cash Flow vs Unlevered Free Cash Flow)
  • Comparable company analysis
  • DCF modeling guide
  • Financial modeling best practices

Financial Modeling Certification
