Levered free cash flow (LFCF) is the amount of money a company has left remaining after paying all of its financial obligations. LFCF is the amount of cash a company has after paying debts, while unlevered free cash flow (UFCF) is cash before debt payments are made. Levered free cash flow is important because it is the amount of cash that a company can use to pay dividends and make investments in the business.
Formula and Calculation of Levered Free Cash Flow
LFCF = EBITDA - ΔNWC - CapEx - D
where:
EBITDA = Earnings before interest, taxes, depreciation, and amortization
ΔNWC = Change in net working capital
CapEx = Capital expenditures
D = Mandatory debt payments
Levered free cash flow is a measure of a company's ability to expand its business and to pay returns to shareholders (dividends or buybacks) via the money generated through operations. It may also be used as an indicator of a company's ability to obtain additional capital through financing.
If a company already has a significant amount of debt and has little in the way of a cash cushion after meeting its obligations, it may be difficult for the company to obtain additional financing from a lender. If, however, a company has a healthy amount of levered free cash flow, it then becomes a more attractive investment and a low-risk borrower.
What a company chooses to do with its levered free cash flow is also important to investors. A company may choose to devote a substantial amount of its levered free cash flow to dividend payments or for investment in the company. If, on the other hand, the company's management perceives an important opportunity for growth and market expansion, it may choose to devote nearly all of its levered free cash flow to funding potential growth.
Source: Investopedia, What Is Levered Free Cash Flow (LFCF)? Definition and Calculation, accessed 25 December 2023, <https://www.investopedia.com/terms/l/levered-free-cash-flow.asp>
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