Levered Free Cash Flow Calculator

Levered free cash flow (LFCF) is the amount of money available to a company after all expenses have been deducted and that belongs to shareholders. It includes operating costs, investments required to maintain the business, and financial obligations associated with debt. The term "levered" refers to the last part. Since this metric already takes into account interest and credit costs, the remaining amount actually represents the cash available to shareholders.

When you input the net income, depreciation and amortization (D&A), changes in working capital, capital expenditures, and net debt, the tool instantly calculates levered free cash flow. You can leave one of the six items blank to back-calculate that value. By activating additional options, you can derive net income from EBIT or EBITDA and compare it with unlevered free cash flow, or review results by profitability ratios and per share metrics.

What is leveraged free cash flow?

Levered free cash flow (LFCF), also known as Free Cash Flow to Equity (FCFE), measures the amount of cash a company generates after operating expenses, investments and debt payments. Operating expenses include manufacturing costs and administrative expenses. Investments include changes in working capital and capital expenditures. Debt-related payments include interest and mandatory amortization.

The amount of cash remaining after these items is available to shareholders. Management can distribute it as a dividend, buy back shares or reinvest in the business. Companies that can consistently generate stable levered free cash flow have the ability to pay this out to owners and weather tough times. Businesses with insufficient cash balances rely on their balance sheet to keep operations going.

Formula for calculating levered free cash flow.

Net income is the bottom line on an income statement after interest and taxes have been deducted. D&A stands for depreciation and amortization and are expenses that do not involve a direct cash outlay. Since there is no actual cash flow involved, they are added back in. The change in net working capital indicates whether cash was tied up or released as part of the day-to-day operations of the business. Capital expenditures are cash outlays for long-term assets. Net debt issuance is the difference between new debt and repaid debt and is included because it represents funds that are available to shareholders.

Let's do the math with an example: if we add 250 to the 30s, subtract the increase in working capital of 10, subtract the capex of 50 and add the net borrowing of 20, we get a leveraged free cash flow of 240 million. This is healthy cash on hand after debt service that the company can use to fund new store openings, pay dividends or reduce debt.

Watch for positive and negative changes in net working capital.

Net working capital is often an area where mistakes are made. The rules are actually very simple when you look at the direction of change. If net working capital increases, it means cash has been tied up in receivables or inventory which results in a drain on cash and must be subtracted. If net working capital decreases, then cash has been freed up and must be added. In this calculator, we are entering an increase in net working capital. Enter a positive number for an increase and a negative number for a decrease.

Here's how to use this calculator:

Enter the three numbers that every company discloses: net income from the income statement, and D&A and capex from the cash flow statement. Optionally enter changes in working capital and net debt issuance. As these two starting values are usually zero, you only need to enter the first three items. Once you've entered those, you'll immediately see the result, along with a clear breakdown of how each item adds up to the total.

The calculators also allow you to work backwards. Suppose that you have a desired leverage-free cash flow and want to know what net income is required to achieve it. Enter the target value in the "Leverage-Free Cash Flow" field, fill out the other fields as appropriate, and leave the Net Income field blank. In the same way, you can also work backwards from any of the five elements based on the others.

Another way to achieve the same result:

Analysts often start with a higher level of the income statement but no matter which path you take, you will end up at the same leveraged free cash flow. If you start with operating profit, it looks like this:

If you start with EBITDA, depreciation, amortization, interest and taxes are all subtracted.

The easiest method is to start directly with the statement of cash flows since operating cash flow already includes net income, depreciation and changes in working capital.

If you open the "Net Income Breakdown" option and enter EBIT or EBITDA, interest and tax rate, then the calculator will calculate net income step by step and integrate it into the leverage-free cash flow. A similar concept is also used in real estate. The leveraged cash flow is the operating profit minus debt service, i.e. the sum of interest and amortization of a mortgage loan.

Leveraged and Unleveraged Free Cash Flows

This is the most common comparison. The unlevered free cash flow also called Free Cash Flow to Firm (FCFF), represents what belongs to the company and measures cash flows before financing. It starts with earnings after tax instead of net income, and completely ignores interest and debt repayments. Leveraged free cash flow takes these positions into account and only represents the cash flow that goes to shareholders.

This distinction determines the discount rate to be used. The unlevered free cash flow is combined with the weighted average cost of capital to determine enterprise value. This is why in most discounted cash flow models, the unlevered free cash flow is used. The levered free cash flow is combined with the equity cost and leads directly to shareholder value. The levered method is more complex and produces less stable results, which is why it's mainly used by banks and other financial institutions as debt is an integral part of their business model. By selecting the "unleveraged" option both values can be shown side-by-side.