Posted on 26 January 2025
Author : Haya Assem
Reviewed By : Enerpize Team

Levered Free Cash Flow Formula: Calculating & Examples

levered free cash flow formula

Levered free cash flow (LFCF) is a key financial metric that shows how much cash a company has available to equity shareholders after covering its financial obligations. It is critical for investors and business owners as it highlights the company’s ability to generate cash after paying for its financial commitments, enabling them to assess the potential for dividends, reinvestment, or further debt reduction.

 

Key Takeaways

  • LFCF represents the cash available to equity holders after covering debt payments and operational expenses.
  • The formula for calculating LFCF is: Net Income + D&A - NWC - Capex + Net Borrowing.
  • Understanding LFCF helps in evaluating a company’s financial health and its ability to reinvest, pay dividends, or service debt.
  • You can differentiate the levered free cash flow formula from unlevered by how debt payments are accounted for, which impacts the overall cash flow calculation.

 

What is Levered Free Cash Flow?

Levered free cash flow (LFCF) is the amount of cash a company has after paying its operating expenses, taxes, and interest on its debt. It represents the cash that is available to equity shareholders after accounting for debt-related payments. LFCF is important because it shows how much cash a company can use for dividends, reinvestment, or paying down debt after covering its financial obligations.

 

Levered Free Cash Flow Formula

To calculate LFCF, you need to consider several key financial components that reflect both operational and financial activities. Here is the formula for levered free cash flow:

LFCF = Net Income + Depreciation & Amortization (D&A) - Change in Net Working Capital (NWC) - Capital Expenditures (Capex) + Net Borrowing

 

The formula above outlines the core components needed to determine the LFCF. Let’s break it down further:

  • Net Income: This is the company’s profit after all expenses, taxes, and interest. It’s usually found at the bottom of the income statement and serves as the starting point for calculating LFCF.
  • Depreciation & Amortization (D&A): These are non-cash expenses that reduce net income but do not involve actual cash outflows. Adding back depreciation of tangible assets and amortization of intangible assets helps to reflect the company’s true cash position.
  • Change in Net Working Capital (NWC): This is the difference between current assets and current liabilities. If NWC increases, it means more cash is tied up in working capital. If it decreases, cash is being freed up from working capital.
  • Capital Expenditures (Capex): These are cash outflows used for acquiring or maintaining physical assets, such as property, equipment, or technology. Capex is subtracted because it represents an investment in the company that reduces cash available.
  • Net Borrowing: This represents the net amount of new debt raised, minus any debt repayments made during the period. New borrowings increase cash, while debt repayments reduce available cash.

 

How to Calculate Levered Free Cash Flow

To calculate LFCF, follow these steps:

  1. Start with the net income from the company’s income statement.
  2. Add back depreciation and amortization since they are non-cash expenses.
  3. Adjust for the change in net working capital—subtract it if working capital has increased or add it if it has decreased.
  4. Subtract any capital expenditures, as this is cash used for long-term investments.
  5. Finally, if the company has raised new debt, add that amount, but subtract any debt repayments.

 

 

Example of Calculating Levered Free Cash Flow 

Let’s assume a company has the following financial data for the year:

It reported a net income of $15 million, and its depreciation & amortization totaled $4 million. The company experienced a decrease in net working capital by $1 million, which indicates that more cash was released from its current assets and liabilities. Additionally, the company spent $6 million on capital expenditures, investing in long-term assets. Finally, the company raised $2 million in net borrowing, adding to its cash position for the year.

 

Step-by-Step Calculation:

 

1- Start with Net Income:

Net Income = $15 million

 

2- Add Depreciation & Amortization (D&A):

D&A = $4 million (these are non-cash expenses, so we add them back)
Net Income + D&A = $15M + $4M = $19 million

 

3- Adjust for Change in Net Working Capital (NWC):

Change in NWC = -$1 million (this is a decrease in working capital, so we add it)
$19 million + (-$1 million) = $18 million

 

4- Subtract Capital Expenditures (Capex):

Capex = $6 million (this is cash spent on long-term investments, so we subtract it)
$18 million - $6 million = $12 million

 

5- Add Net Borrowing:

Net Borrowing = $2 million (new debt raised, so we add it)
$12 million + $2 million = $14 million

 

Result

LFCF for this company is $14 million. This means the company has $14 million in cash available after paying its operating expenses, investing in assets, and servicing its debt. 

 

Levered VS Unlevered Free Cash Flow Formula

When analyzing a company’s financial health and valuation, understanding the difference between levered free cash flow and unlevered free cash flow is crucial. While both metrics measure the cash a company generates, the key difference lies in how they account for debt. LFCF includes debt-related payments, reflecting the cash available to equity holders after the company has met its financial obligations.

In contrast, UFCF excludes debt payments, providing a clearer picture of a company’s operational cash flow before any financing activities are considered. Both formulas are essential for different purposes, especially when valuing a business using the discounted cash flow (DCF) method.

 

To calculate unlevered free cash flow, you can use the following formula:

EBIT - Taxes + D&A - CapEx - Increase in NWC

 

Here is a breakdown of the formula components:

  • EBIT (Earnings Before Interest and Taxes): This is the company’s operating profit before interest and tax expenses. It reflects the company’s profitability from core operations.
  • Taxes: Subtracting taxes accounts for the company’s tax liability, ensuring that only the after-tax operating profit is used to calculate cash flow.
  • D&A (Depreciation & Amortization): These are non-cash expenses. Adding them back adjusts for the fact that they reduce EBIT but don’t actually use cash.
  • CapEx (Capital Expenditures): This represents the cash spent on acquiring or upgrading long-term assets, such as equipment, buildings, or technology. It is subtracted because it’s an actual cash outflow.
  • Increase in NWC (Net Working Capital): This accounts for changes in a company’s working capital. An increase in NWC means cash is tied up in operating assets, so it's subtracted. A decrease in NWC would free up cash, so it would be added.

 

How Can Enerpize Calculate Levered Free Cash Flow

Enerpize can simplify the process of calculating levered free cash flow by automatically integrating financial data from various sources, including the income statement, balance sheet, and cash flow statement. The platform helps business owners and financial managers easily track key financial metrics such as net income, depreciation & amortization, changes in net working capital, capital expenditures, and debt repayments. By automating the calculations, Enerpize's online accounting software ensures that the LFCF is accurate, timely, and free from manual errors.

Additionally, Enerpize provides real-time data updates and generates detailed reports and visualizations, offering valuable insights into how debt and capital expenditures affect cash flow. This functionality helps users assess the company’s ability to service debt, pay dividends, reinvest in growth, and make informed financial decisions, improving overall business planning and financial management.

how can enerpize calculate levered free cash flow

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Calculating levered free cash flow formula is easy with Enerpize.

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Try our accounting module to manage your cash flow automaically.

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