Levered Free Cash Flow Calculator
Our excellent levered free cash flow calculator helps you obtain the amount of cash generated after paying debt obligations. This article will cover what is levered free cash flow, explain the formula for levered free cash flow, and explore a real-life example of computing it. As a bonus, we compare levered free cash flow vs. unlevered free cash flow.
What is levered free cash flow?
Do you remember free cash flow calculator (also called FCF)? Well, levered free cash flow is a related concept that considers the company has already paid its mandatory debt for the period. After such payment, the levered free cash flow (LFCF) is the remaining money.
It is an essential financial indicator because it shows the company's capability to:
- Acquire other businesses. Remember, when you buy companies, you consider the enterprise value as the price tag.
- Expand its operations.
- Pay dividends or increase the current dividend payments.
- Get more debt.
As you can see, the levered free cash flow represents the money left for the shareholders, which can compound more significant returns over time if the company uses it wisely.
How to calculate levered free cash flow – Formula
The levered free cash flow formula starts from EBITDA and includes the net change in working capital (NWC), the capital expenditures (CapEx), and the mandatory debt payment. In other words:
LFCF = EBITDA + Δ(NWC) - CapEx - Mandatory debt payment
You can obtain EBITDA from the income statement and cash flow statement; meanwhile, you can find the other three related terms in the cash flow statement.
It is controversial regarding mandatory debt payment since companies do not tend to specify which part is obligatory and which is not. As a solution, we can use the debt/borrowing payments that companies report in the cash flow statement section: Cash from financing.
Sounds difficult? Don't worry. Our levered free cash flow calculator will be there to help solve any doubts: You need to hover the cursor over the variable required to get some help.
Levered free cash flow real example
We will use for building the levered free cash flow formula.
From page 41 (the income statement) and 45 (the cash flow statement), we can build EBITDA. Remember:
EBITDA = net income + interest paid + tax income + depreciation & amortization
Then:
EBITDA 2019 = 4,141 MUSD - 92 MUSD - 245 MUSD + 262 MUSD
EBITDA 2019 = 4,066 MUSD
Where MUSD is millions of US dollars.
We are subtracting the effective corporate tax because there was a tax benefit, not an expense. Besides, we are also subtracting the interest expense because there was an interest income. The reason for an interest income might be because of a high amount of short-term investments that generate interest. You can verify with the quick ratio.
Once we have EBITDA, the next items in the levered free cash flow formula are the net change in working capital, the capital expenditures (CapEx), and the mandatory debt payment. You can find them in the cash flow statement, particularly in the cash flow from operating activities section as: "Changes in operating assets and liabilities."
Net change in working capital = -857 MUSD
Regarding CapEx, you can find it in cash from investing activities section as "Purchases of property and equipment and intangible assets."
Capital expenditures = -600 MUSD
Finally, we need to obtain the mandatory debt payment amount. Check the "cash flow from financing activities section". There you will find an item called "Repayment of Convertible Notes". This item relates to debt payments. We cannot state that are precisely "mandatory debt payments", but considering overall debt service coverage, we can consider it a good proxy.
Mandatory debt payments = -16 MUSD
Hence, we have:
Levered free cash flow = 4066 MUSD - 857 MUSD - 600 MUSD - 16 MUSD
Levered free cash flow = 2593 MUSD
In the following chart, you can see EBITDA, NWC, CapEx, and mandatory payment values (expressed in millions) since 2017 and including the last trailing twelve month values.
2017 | 2018 | 2019 | 2020 | 2021-JAN | TTM - 2021-DEC | |
|---|---|---|---|---|---|---|
EBITDA | 2124 | 3409 | 4066 | 3227 | 5819 | 9759 |
Net working capital change | -679 | 185 | -857 | 717 | -703 | -2594 |
Capital expenditures | -176 | -593 | -600 | -489 | -1128 | -986 |
Mandatory debt payments | -673 | -812 | -16 | 0 | 0 | -1000 |
NVIDIA Levered Free Cash Flow | 596 | 2189 | 2593 | 3455 | 3988 | 5179 |
Now that we have explained levered free cash flow and how to calculate it, we will cover how to interpret it.
How to interpret the levered free cash flow?
We mainly seek levered free cash flow growth because it indicates that the company makes more money for its shareholders every year. If you check the values above and calculate its compound annual growth rate for the five years of utilized data, you find out that the company has been compounding at a fantastic rate of 54% CAGR.
Such companies are cash generators and are indeed an excellent investment. Just do not forget the EV sales multiple or the fair value calculated by the DCF method so you do not buy the stock at high prices.
You will see high free cash flow growth in all great companies with great stock returns. Other free cash flow values worth noting are the one to the firm (FCFF) and the one to equity (FCFE). Discover them with Omni tools:
FAQ
What is a good levered free cash flow growth?
Generally speaking, a levered free cash flow constantly growing annually at a rate of 20% is considered tremendous. Just see the math, if LFCF grows every year 20%, then in 3.6 years, it will double. In other words, if the company keeps the same valuation multiples price to free cash flow, we would see the stock price double in the same amount of time (100% return in less than four years).
Is it bad to have a negative levered free cash flow?
The short answer is "not necessarily". Not having positive levered free cash flow does not indicate a poor financial situation for a company. Here we need to understand why it is a negative value; if it's because of negative EBITDA, we might have a problem because it means the company does not generate profits from their core operations.
How do I calculate levered free cash flow?
To calculate the levered free cash flow:
- First, obtain EBITDA. You can calculate it by starting with the net income, then adding back the interest expense, the tax expense, and the depreciation and amortization.
- Next, get the net change in working capital (NWC), the capital expenditures (CapEx), and the mandatory debt repayment.
- Finally, you subtract from EBITDA, the NWC (in case there was a cash outflow), the CapEx, and the mandatory debt repayment to calculate the levered free cash flow.
What is the difference between levered and unlevered free cash flow?
The three main differences between the levered free cash flow vs. unlevered are:
- Both represent the money available for the shareholders, but the unlevered free cash flow also includes the money owed to the debt-holders.
- Levered free cash flow represents the free money a company can use to pay dividends, buy other companies, or conduct shares buybacks.
- Unlevered free cash flow first has to cover the required debt payment for considering dividends, acquisitions, or buying back shares.