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What Is Unlevered Free Cash Flow (UFCF)? Definition and Formula
- 5 min read
- Authored & Reviewed by: CLFI Team
Unlevered Free Cash Flow, commonly referred to as UFCF, or also known as Free Cash Flow to the Firm (FCFF) is one of the most important cash flow measures used in valuation and corporate finance. It represents the cash generated by a business that is available to all capital providers, regardless of how the company is financed. As such, UFCF forms the foundation of enterprise valuation and discounted cash flow analysis.
Unlike accounting profit, unlevered free cash flow focuses on cash generation from operations after necessary reinvestment, but before any financing decisions. This makes it particularly useful when comparing companies with different capital structures or assessing value independently of leverage.
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What Is Unlevered Free Cash Flow
Definition:
Unlevered Free Cash Flow (UFCF)
The cash flow generated by a company’s operations after taxes and reinvestment, but before any payments to debt or equity holders.
Unlevered free cash flow reflects the underlying cash-generating ability of a business without regard to its financing structure. By excluding interest payments and debt repayments, UFCF isolates operating performance and investment needs from leverage decisions.
This characteristic makes UFCF especially useful when valuing a firm as a whole. Because it represents cash available to both debt and equity providers, it aligns naturally with enterprise value rather than equity value.
Why UFCF Matters in Valuation
In valuation, the choice of cash flow measure determines what is being valued. Unlevered free cash flow is discounted using the weighted average cost of capital, which reflects the required return for all capital providers. This pairing ensures internal consistency between cash flows and discount rates.
By contrast, levered free cash flow incorporates financing effects and is therefore sensitive to capital structure choices. UFCF avoids this dependence, allowing analysts to assess enterprise value independently of how the business is funded today.
The main limitation of UFCF lies in estimation risk. Forecasting operating performance, capital expenditure, and working capital requirements requires judgement, and small changes in assumptions can materially affect valuation outcomes.
UFCF Formula Explained
Unlevered free cash flow can be derived from operating profit by adjusting for taxes and reinvestment needs. A commonly used formulation starts from earnings before interest and tax and applies a notional tax charge to reflect operating taxation.
In simplified terms, UFCF equals operating profit after tax, plus non-cash charges, minus capital expenditure and changes in working capital. Interest expense and debt repayments are excluded, as these relate to financing rather than operations.
This structure ensures that UFCF captures cash generated by the firm’s assets, not by its capital structure. As a result, it can be applied consistently across firms with different leverage profiles.
Applied Example
Unlevered Free Cash Flow: Applied Example
From operating profit to enterprise value — calculating the cash available to all capital providers.
Consider a company that generates operating profit of £200 million. To determine the cash available to both lenders and shareholders, we calculate unlevered free cash flow (UFCF) by adjusting for taxes, non-cash charges, capital expenditure, and working capital changes.
Calculate Unlevered Free Cash Flow
| Component | Amount (£m) |
|---|---|
| Operating Profit (EBIT) | 200.0 |
| Less: Tax on EBIT (25%) | (50.0) |
| Net Operating Profit After Tax (NOPAT) | 150.0 |
| Add: Depreciation & Amortisation | 40.0 |
| Less: Capital Expenditure | (50.0) |
| Less: Change in Working Capital | (10.0) |
| Unlevered Free Cash Flow (UFCF) | 130.0 |
Annual Unlevered Free Cash Flow: £130 million
This £130 million represents the cash generated by the business operations, available to both debt and equity holders, before considering the effects of financial structure.
Forecast and discount UFCF to determine Enterprise Value
If this cash flow is forecast over multiple years and discounted using the firm's weighted average cost of capital (WACC), the present value of those cash flows represents the enterprise value of the business.
Where each year's UFCF is discounted back to present value using the appropriate discount rate.
Assume the company's WACC is 8% and UFCF is expected to remain constant at £130 million for five years, with a terminal value thereafter.
| Year | UFCF (£m) | Discount Factor (8%) | Present Value (£m) |
|---|---|---|---|
| 1 | 130.0 | 0.9259 | 120.4 |
| 2 | 130.0 | 0.8573 | 111.4 |
| 3 | 130.0 | 0.7938 | 103.2 |
| 4 | 130.0 | 0.7350 | 95.6 |
| 5 | 130.0 | 0.6806 | 88.5 |
| Total PV of Forecast Period | 519.1 | ||
| Terminal Value (PV) | 1,105.0 | ||
| Enterprise Value | 1,624.1 | ||
Bridge from Enterprise Value to Equity Value
From enterprise value, net debt is deducted to arrive at equity value — the value attributable to shareholders.
| Component | Amount (£m) |
|---|---|
| Enterprise Value | 1,624.1 |
| Less: Gross Debt | (400.0) |
| Add: Cash & Cash Equivalents | 100.0 |
| Net Debt | (300.0) |
| Equity Value | 1,324.1 |
Equity Value: £1,324.1 million
Learning takeaway
Unlevered Free Cash Flow forms the foundation of enterprise valuation because it measures cash generation independent of capital structure. By discounting UFCF at the WACC, analysts determine what the entire business is worth to all investors. Subtracting net debt then isolates the value belonging specifically to equity holders. This methodology is widely used in DCF analysis, M&A transactions, and strategic planning.
UFCF in Corporate Finance Practice
In corporate finance practice, unlevered free cash flow is the reference cash flow used to assess enterprise value across mergers and acquisitions, private equity transactions, and long-term strategic investments. By excluding financing effects, UFCF allows decision-makers to compare projects and acquisition targets on a consistent basis, focusing on operating performance, capital intensity, and reinvestment requirements rather than capital structure choices that may vary across bidders or owners.
In practice, boards and investment committees rely on UFCF-based valuation to assess whether projected operating cash flows are sufficient to justify acquisition premiums, large capital expenditures, or transformational strategic initiatives. While this approach improves comparability and discipline, it remains sensitive to forecasting assumptions, terminal value estimation, and the choice of discount rate, which means governance oversight and scenario analysis remain essential to avoid overstating value.
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