 |
| Image: Moneybestpal.com |
Unlevered free cash flow (UFCF) is a metric used to describe how much money a business makes from its core activities before taking its debt into account. To determine a company's enterprise value, it is frequently employed in valuation techniques like discounted cash flow analysis (DCF). Regardless of a company's financial structure, UFCF can be used to compare the performance of other companies.
Earnings before interest, taxes, depreciation, and amortization (EBITDA), a proxy for a company's operational income, must be the first input into the UFCF formula. Adding back depreciation and amortization costs to operating income will yield EBITDA, which may be found on the income statement. The investments made in permanent assets like buildings, machines, and equipment are known as capital expenditures (CAPEX), which must be deducted.
The net change in property, plant, and equipment (PPE), which is seen on the cash flow statement, can be subtracted from depreciation and amortization costs to determine CAPEX. The change in working capital, which is the difference between current assets and current liabilities, must then be subtracted. The money required to finance a company's ongoing operations is known as working capital. Finally, we must deduct taxes, which are computed depending on the firm's effective tax rate. EBITDA can be multiplied by the effective tax rate to compute taxes, or they can be found on the income statement.
The formula for UFCF is:
UFCF = EBITDA - CAPEX - Change in Working Capital - Taxes
For example, suppose a company has the following financial information:
- EBITDA: $100 million
- CAPEX: $20 million
- Change in Working Capital: $10 million
- Effective Tax Rate: 25%
UFCF = 100 - 20 - 10 - (100 x 0.25) = $35 million
This indicates that after paying operational costs and investing activities, the business has $35 million in cash on hand to pay its creditors and equity holders.
