Enter the operating income value in the selected currency.
Enter the tax rate as a percentage.
Enter the depreciation and amortization value in the selected currency.
Enter the capital expenditures value in the selected currency.
Enter the change in working capital value in the selected currency.
History:

Explanation

What is Unlevered Free Cash Flow (UFCF)?

Unlevered Free Cash Flow (UFCF) is a measure of a company’s financial performance that shows how much cash is available to all investors, including equity and debt holders, after all operating expenses and taxes have been paid. It is an important metric for investors and analysts as it provides insight into the company’s ability to generate cash from its operations without the impact of capital structure.

How to calculate Unlevered Free Cash Flow?

The formula to calculate UFCF is as follows:

UFCF = (EBIT × (1 - Tax Rate)) + Depreciation - CapEx - Change in Working Capital

where:

  • §§ UFCF §§ — Unlevered Free Cash Flow
  • §§ EBIT §§ — Earnings Before Interest and Taxes (Operating Income)
  • §§ Tax Rate §§ — Corporate tax rate (expressed as a decimal)
  • §§ Depreciation §§ — Non-cash expense representing the reduction in value of tangible assets
  • §§ CapEx §§ — Capital Expenditures, which are funds used by a company to acquire or upgrade physical assets
  • §§ Change in Working Capital §§ — The difference in current assets and current liabilities, indicating the cash tied up in operations

Example Calculation

Let’s say a company has the following financial data:

  • Operating Income (EBIT): $100,000
  • Tax Rate: 30% (0.30)
  • Depreciation: $20,000
  • Capital Expenditures (CapEx): $15,000
  • Change in Working Capital: $5,000

Using the UFCF formula:

  1. Calculate the after-tax EBIT:

    • After-tax EBIT = EBIT × (1 - Tax Rate) = $100,000 × (1 - 0.30) = $70,000

  2. Now plug the values into the UFCF formula:

    • UFCF = $70,000 + $20,000 - $15,000 - $5,000
    • UFCF = $70,000 + $20,000 - $15,000 - $5,000 = $70,000

Thus, the Unlevered Free Cash Flow is $70,000.

When to use the Unlevered Free Cash Flow Calculator?

  1. Valuation Analysis: Investors can use UFCF to assess the value of a business, especially in discounted cash flow (DCF) models.
  2. Financial Health Assessment: Determine the cash-generating ability of a company without the effects of its capital structure.
  3. Investment Decisions: Evaluate potential investments by comparing UFCF across different companies or industries.
  4. Performance Tracking: Monitor changes in UFCF over time to gauge operational efficiency and financial performance.
  5. Mergers and Acquisitions: Analyze the cash flow potential of target companies during the due diligence process.

Key Terms Defined

  • EBIT (Earnings Before Interest and Taxes): A measure of a firm’s profit that includes all incomes and expenses (except interest expenses and income tax expenses).
  • Tax Rate: The percentage at which income or profits are taxed by the government.
  • Depreciation: The allocation of the cost of a tangible asset over its useful life, reflecting wear and tear.
  • Capital Expenditures (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment.
  • Working Capital: The difference between a company’s current assets and current liabilities, indicating the short-term liquidity of the business.

Practical Examples

  • Business Valuation: A financial analyst may use the UFCF to determine the value of a company during a merger or acquisition.
  • Investment Analysis: Investors can compare the UFCF of different companies to identify which ones are generating more cash from their operations.
  • Budgeting and Forecasting: Companies can use UFCF to plan for future capital needs and assess their ability to fund growth initiatives.

Use the calculator above to input different values and see the Unlevered Free Cash Flow change dynamically. The results will help you make informed decisions based on the financial data you have.