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The handy unlevered free cash flow calculator helps determine the free cash available to the equity-holders and debt-holders. It is a measure that some financial institutions consider because it shows debt repayment capability.

In this article, we cover what the unlevered free cash flow is, how to calculate it, and a real-life example about how to interpret it.

What is the unlevered free cash flow?

The unlevered free cash flow (UFCF) represents the money left from the operations of the company to pay to the stockholders (with dividends for example) and debtholders (principal's debt and interests).

We can say it is the company's cash before considering the equity and financial obligations. Consequently, it is beneficial for determining a company's operating growth. Free cash flow to firm is another name for UFCF.

Remember the initial concept from the free cash flow calculator? The unlevered free cash flow differs because it does not consider interest expenses. Here are the main components of the UFCF:

  1. EBIT: Earnings before interests expenses and taxes.
  2. Effective tax rate (ETR).
  3. Depreciation and amortization (DA).
  4. Capital expenditures (CapEx): An investing cash flow that aims to expand the company.
  5. Change in working capital (ΔWC): Cash flows related to the increase/decrease of credit sales, inventory, and credit purchases.

In the next section, we will cover the unlevered free cash flow formula.

How to calculate the unlevered free cash flow

We are going to use all the items we mentioned above to calculate the unlevered free cash flow:

UFCF=EBIT×(1ETR)+DACapEx+ΔWC \footnotesize UFCF = EBIT × (1 - ETR) + DA - CapEx + ΔWC

The EBIT×(1ETR)\footnotesize \rm {EBIT × (1 - ETR)} represents the net operating profit after tax (more details on the NOPAT calculator). We add back the depreciation & amortization DA\footnotesize DA, which is a non-cash expense. Then, we subtract capital expenditures CapEx\footnotesize CapEx, which refers to company investments to expand the business. Finally, we include the effect of the working capital cash flows ΔWC\footnotesize ΔWC.

Our UFCF formula considers the change in working capital stated in the cash flow statement, not the one calculated from the balance sheet. If the change in working capital generated an outflow, you would have to add a negative sign.

Here is a brief explanation about cash outflows/inflows in the working capital:

  1. Positive change in working capital (an increase in value): Refers to a cash inflow. The company is receiving money. In this case, you will see a decrease in accounts receivables or inventory on the balance sheet, which means the company has sold more products or got paid from its credit sales.

  2. Negative change in working capital (a decrease in value): Indicates a cash outflow. For example, the company is spending money on inventory that has not been sold. Consequently, you might see how the inventory account has increased on the balance sheet. It is money locked there.

How to use the unlevered free cash flow calculator – Real-life example

We will calculate the Nvidia 2021 unlevered free cash flow. From page 47, the income statement, we get:

EBIT=4,532 MUSD\footnotesize \rm {EBIT = 4,532 \ MUSD}
ETR=1.74%\footnotesize \rm {ETR = 1.74 \%}

We obtain the tax rate by the following formula:

ETR=Income tax expenseIncome beforeincome tax

\footnotesize \rm {ETR = \frac{Income \ tax \ expense} {Income \ before income \ tax}}

, which for our example equals to:

ETR=(77MUSD/4,409MUSD)×100%\footnotesize \rm {ETR = (77 MUSD / 4,409 MUSD) \times 100 \% }

ETR=1.74%\footnotesize \rm {ETR = 1.74 \%}

On the other hand, from the cash flow statement, page 51:

DA=1,098 MUSD\footnotesize \rm {DA = 1,098 \ MUSD}
CAPEX=1,128 MUSD\footnotesize \rm {CAPEX = -1,128 \ MUSD }
ΔWC=703 MUSD\footnotesize \rm {ΔWC = -703 \ MUSD}, expressed as the Changes in operating assets and liabilities, net of acquisitions on the cash flow statement.

Note MUSD refers to million USD.

Then, after adding this information to our unlevered free cash flow calculator, we get:

UFCF=4,532 MUSD×(11.74%)+1,098 MUSD1,128 MUSD703 MUSD\footnotesize \rm {UFCF = 4,532 \ MUSD \times (1 - 1.74 \%) + 1,098 \ MUSD - 1,128 \ MUSD - 703 \ MUSD}

UFCF=3,720.14 MUSD\footnotesize \rm {UFCF =3,720.14 \ MUSD}

Conclusion: Nvidia recorded an unlevered free cash flow of 3,720.14 million USD during the 2021 fiscal year.

What are the differences between unlevered vs levered free cash flow?

Here are the main differences:

  1. Unlevered free cash flow starts with NOPAT and adds back depreciation and amortization. Then it includes the effect of capital expenditures and working capital cash flows. On the other hand, as per the levered free cash flow calculator, the LFCF starts with EBITDA and subtracts mandatory debt payments.

  2. Because LFCF (leveraged free cash flow) is net of mandatory debt payments, it represents the remaining money for the stockholders; meanwhile, the UFCF is available to both the stockholders and debt holders.

How do investors use unlevered free cash flow?

As you could have seen from the unlevered free cash flow formula, it does not include debt principal payments or interest. Consequently, it becomes important to add the interest coverage ratio calculator or the debt service coverage ratio calculator to our analysis. For companies with high debt and, particularly, high asset risk, we recommend using the LFCF over the UFCF.

Furthermore, investors can compare UFCF value to price similarly to the price/earnings ratio. The idea here is to choose the company that makes the lower relation: stock price/UFCF.

Finally, analysts and investors prefer the UFCF for their discounted cash flow analysis because its the money available for paying the owners and the debtors. It represents the return over the invested capital in the company.


What is a good unlevered free cash flow?

There are several ways to determine if your company has an excellent unlevered free cash flow. Here are two of them:

  1. Compare it to its revenue and get the unlevered free cash flow margin. The result indicates how much free cash the company obtains from its revenues.
  2. Find out its compound annual growth rate (CAGR). Usually, any company with a UFCF CAGR above 15% for the last three years is a good pick.

What is a bad unlevered free cash flow?

The bad UFCF is the one that is not enough to pay debt obligations. Consequently, you should not only rely on this value but also include debt/interest coverage metrics such as the interest coverage ratio and the debt service coverage ratio. Besides, a UFCF that is contracting instead of growing is also a non-desirable one.

How to calculate the unlevered free cash flow?

  1. First, obtain the net operating profit after tax (NOPAT). You can calculate it by EBIT×(1Effective tax rate)\footnotesize \rm {EBIT × (1 - Effective \ tax \ rate)}. You can find all these values in the income statement.
  2. Second, subtract the depreciation, amortization, and include the cash flow effect of the change in working capital. You will find all these values in the operating section of the cash flow statement.
  3. Finally, subtract the capital expenditures (CAPEX), which you will find in the cash flow statement as well.

What to do if the company has negative unlevered free cash flow?

  1. Find out the reason why the company has negative UFCF. Is it because of negative EBIT? Too much CAPEX? Too much cash outflow due to working capital (WC)?
  2. If EBIT is negative, check EBITDA. Still, be careful. It is probably a company that is not profitable from the point of view of its operations.
  3. If EBIT is positive, check the CAPEX and the WC. Analyze whether the investments in such items will produce significant returns in the future.

What are the differences between unlevered free cash flow vs levered FCF?

The main difference is in the UFCF formula. Unlevered free cash flow starts with EBIT and the effective tax rate or NOPAT; meanwhile, levered free cash flow starts with EBITDA. Besides, LFCF is net of mandatory debt payments, whereas UFCF is the free money available for paying debt principal and interests and any benefit for stockholders.

Arturo Barrantes
Effective tax rate (ETR)
Depreciation and amortization (DA)
Capital expenditures (CAPEX)
Net change in working capital (ΔWC)
Unlevered free cash flow (UFCF)
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