Levered Free Cash Flow Calculator

Thanks to this tool, you can quickly estimate how much cash a company has generated after paying its debt burdens. Such information reveals vital information about the company's financial condition and gives an idea of how much it can invest.

This article explains the leveraged free cash flow concept, how you can calculate it, and how it differs from unleveraged free cash flow.

What is Levered Free Cash Flow?

Levered Free Cash Flow (LFCF) is a metric similar to Free Cash Flow, but the leveraged version considers the company's debt obligations for the analyzed period. 

• LFCF reveals how much cash the company has left after paying its debt obligations for the examined period.
• LFCF tells how much money the company can invest.
• It shows if the company can produce or increase dividends.
• Indicates if the company can raise more debt.

How to calculate Levered Free Cash Flow?

You can quickly work out Levered Free Cash Flow using our LFCF calculator or manually using the LFCF formula. Before you start, you need to gather all the necessary data about the company's finances.

1. EBITDA is available in the income statement for a particular period.
2. You can find the net change in working capital (NCW), capital expenditures (CapEx), and mandatory debt payments in the cash flow statement.
3. Substitute the obtained values into the LFCF formula presented below.

The levered free cash flow formula

LFCF = EBITDA + NWC - CapEx - mandatory_debt_payments

Where:

• EBITDA - earnings before interest, taxes, depreciation, and amortization
• NWC - net change in working capital
• CapEx - capital expenditures
• mandatory_debt_payments - debt obligations for the examined period.

The practical applications of LFCF.

The LFCF metric shows a company's cash for investments and expansion. However, the most valuable information can be obtained from the LFCF growth rate.

The growing cash flow indicates the company is on the right track and generating more and more money for its shareholders. Such companies have equity for further expansion or to increase dividends for the owners.

The average annual growth rate of the company LFCF can be computed using our CAGR calculator. To do so, you simply need to enter the LFCF values for the beginning and end of the analyzed period.

Companies with a high value of LFCF over a long period are considered cash cows because they provide a continuous cash stream for their owners.

Importance of Levered Free Cash Flow for Investors

LFCF is an indispensable metric for equity investors. It's the pulse on the amount of cash a company has at its disposal after paying debt. Why is it critical?

Cash Availability

It essentially represents the cash that's available to benefit equity investors directly.

Investment Decisions

By using the levered free cash flow calculator, investors can swiftly gauge a company's ability to either reinvest in its growth or pay dividends.

Profitability Insight

Often, LFCF serves as a clearer lens into a company's profitability when juxtaposed with net income.

Interpreting LFCF Values

Understanding LFCF's numerical value is fundamental. A positive LFCF indicates that after considering its capital investments and debt obligations, the company has a surplus. This often hints at a healthier investment.

Positive LFCF

This means the company can sufficiently cover its debt and still have reserves, pointing towards a safer investment avenue.

Negative LFCF

While a negative figure may raise eyebrows, it's essential to consider the broader context. Perhaps the company is in a phase of heavy investment?

LFCF Yield

By dividing LFCF by the enterprise value, this yield is derived. It gives a direct perspective on the company’s cash flow relative to its value.

Limitations of LFCF

Like all metrics, LFCF has its limitations. For instance:

Not a Standalone Metric

Relying solely on LFCF can be misleading. It should be analyzed in tandem with other financial indicators.

Interest Expense

LFCF doesn't segregate interest payments, which can sometimes obscure the company's genuine cash position.

Factors Impacting LFCF

Several variables play a role in the levered free cash flow calculation:

• Amount of Debt: Naturally, a company with substantial debt will have more significant obligations, impacting its LFCF.
• Capital Investments: Heavy investments in a fiscal year can lower the LFCF.
• Change in Net Working Capital: This is a pivotal component in the LFCF formula. A surge in net working capital means more cash is tied up, thus reducing LFCF.
• Cash Flow for Dividends: If a company decides to distribute a significant part of its cash flow as dividends, it can influence the LFCF value.

Is negative levered free cash flow bad for a company?

A negative LFCF is not always a sign of a poor company's condition. Highly leveraged companies may experience periods of negative free cash flow. It is good to analyze trends for a longer time frame to better overview the company's liquidity.

If the company is experiencing negative free cash flow for a short period or its value is steadily improving, it's a sign that the raised debt was well invested. The company is on a good trajectory.

The thing that needs investors' attention is negative EBITDA, which means the company has difficulties generating profits from its business operations.

Comparison with Unleveraged Free Cash Flow

Levered Free Cash Flow (LFCF) represents the cash remaining after a company meets its mandatory debt obligations. On the other hand, Unleveraged Free Cash Flow (UFCF) depicts the cash generated without deducting any debt payments or interest.

LFCF provides insights into the real cash available, which is vital for equity investors due to their position in the payout hierarchy. UFCF, however, offers a view on a company's operational efficiency without the influence of its financial structure.

LFCF can fluctuate based on the company's debt and interest payments, making it sensitive to shifts in the capital structure. Conversely, UFCF remains consistent, undeterred by such financial changes.

Levered Free Cash Flow is essential for evaluating a company's capability to handle its current debt. In contrast, Unleveraged Free Cash Flow is better suited when analyzing cash flow derived purely from operations.

Similar metrics

The LFCF calculator is one of many tools for examining a company's liquidity available at Calcopolis.

Among the most popular, you can find the Cash Flow to Debt Ratio Calculator, Cash Ratio Calculator, and Quick Ratio Calculator.

Authors

Created by Lucas Krysiak on 2022-10-20 11:54:17 | Last review by Mike Kozminsky on 2022-10-22 16:49:38