# What Is Levered Free Cash Flow (LFCF) and How Is It Calculated?

![Levered Free Cash Flow](https://www.investopedia.com/thmb/igC2zdn5Bd3ZJIJJvZTf8RFVk9g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/levered-free-cash-flow-4193698-3x2-blue-1a7d98dfece74211a23f7b189bf8a9ac.jpg)

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## What Is Levered Free Cash Flow (LFCF)?

Levered Free Cash Flow (LFCF) represents the money left after a company satisfies its financial obligations. This residual cash is crucial for paying dividends, reinvesting in the business, and securing additional capital. Calculating LFCF involves subtracting changes in net working capital, capital expenditures, and mandatory debt payments from EBITDA. Understanding LFCF can guide strategic decisions and indicate financial health.  
  

### Key Takeaways

*   Levered free cash flow (LFCF) is the cash remaining after a company has paid its debts and operational costs.
*   LFCF is used for paying dividends, reinvesting in the business, or buying back stock.  
    A negative LFCF can persist even if a company is operationally successful, especially if it has made substantial capital investments.
*   Positive LFCF indicates potential attractiveness to investors and lenders due to the company's ability to manage obligations and generate cash.
*   While levered cash flow considers debt payments, unlevered cash flow does not, making the former a crucial figure for assessing true profitability.

## How to Calculate Levered Free Cash Flow (LFCF)

$\begin{aligned}&LFCF=EBITDA-\Delta NWC-CapEx-D\\&\textbf{where:}\\&\text{EBITDA}=\text{Earnings before interest, taxes,}\\&\qquad\qquad\quad\text{ depreciation, and amortization}\\&\Delta\text{NWC}=\text{Change in net working capital}\\&\text{CapEx}=\text{Capital expenditures}\\&\text{D}=\text{Mandatory debt payments}\end{aligned}$

## Insights From Levered Free Cash Flow Analysis

Levered free cash flow is a measure of a company’s ability to expand its business and to pay returns to [shareholders](https://www.investopedia.com/terms/s/shareholder.asp) ([dividends](https://www.investopedia.com/terms/d/dividend.asp) or [buybacks](https://www.investopedia.com/terms/b/buyback.asp)) via the money generated through operations. It may also be used as an indicator of a company’s ability to obtain additional [capital](https://www.investopedia.com/terms/c/capital.asp) through financing.

If a company has significant debt and little cash leftover, it may struggle to secure financing. 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.

Negative levered free cash flow doesn't always mean that a company is failing. It may be the case that the company has made substantial [capital investments](https://www.investopedia.com/terms/c/capital-investment.asp) that have yet to start paying off. If a company can secure enough cash to last until its [cash flow](https://www.investopedia.com/terms/c/cashflow.asp) improves, temporary negative levered free cash flow is manageable.

What a company chooses to do with its levered free cash flow is also important to [investors](https://www.investopedia.com/terms/i/investor.asp). A company may decide to use much of its levered free cash flow for dividends or business investment. 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.

## Comparing Levered vs. Unlevered Free Cash Flow

Levered free cash flow is the amount of cash a business has after paying debts and other obligations. Unlevered free cash flow (UFCF) is the amount of cash a company has prior to making its debt payments. UFCF is calculated as EBITDA minus CapEx minus working capital minus taxes.

LFCF is the cash flow available to pay shareholders, while UFCF is the money available to pay shareholders and debtholders. Levered free cash flow is considered the more important figure for investors to watch, as it’s a better indicator of a company’s profitability.

## How Is Levered Free Cash Flow (LFCF) Important to a Business?

Levered free cash flow (LFCF) is the amount of cash that a company can use to pay dividends and make investments in the business.

## How Does Levered Free Cash Flow Work?

Levered free cash flow measures the ability of a company to expand its business and to pay returns to shareholders (dividends or buybacks) via the money generated through operations. It may also indicate the ability of a company to obtain additional capital through financing.

## Which Is More Important to Investors: Levered or Unlevered Free Cash Flow?

Levered free cash flow is considered more important for investors to watch than unlevered free cash flow. LFCF is a better indicator of a company’s profitability.

## Key Benefits of Levered Free Cash Flow

Levered Free Cash Flow (LFCF) represents the cash available post-payment of financial obligations and is crucial for understanding a company's financial health. It enables firms to pay dividends, buy back shares, or reinvest in operations, highlighting its significance to investors as an indicator of profitability and capital management. Negative LFCF might signal capital investments yet to yield returns, but a healthy LFCF suggests a low-risk, attractive investment and borrowing potential.