What Is Unlevered Free Cash Flow (UFCF)? Definition and Formula
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
Unlevered free cash flow is the cash a company generates from operations after operating costs, taxes and reinvestment, but before any payments to lenders.
Key takeaways
- The core formula is EBIT × (1 − tax rate) + D&A − CapEx − increase in net working capital.
- Taxes are calculated on EBIT, so UFCF excludes the tax benefit a company gets from deducting interest.
- In the example, UFCF is $110 with every method, while levered free cash flow after debt costs is $55.
- In a DCF, UFCF is discounted at WACC to give enterprise value, then net debt is subtracted to reach equity value.
Unlevered free cash flow (UFCF) is the cash a company generates from its operations after paying operating costs, taxes and the investments needed to keep running and growing, but before any payments to lenders. It shows how much cash the business produces for all of its capital providers, debt holders and shareholders together, regardless of how the company is financed.
What “Unlevered” Means in Finance
In finance, leverage is debt. A levered figure reflects the cost of borrowing. An unlevered figure removes it, so the result depends only on how the operating business performs.
The removal goes further than leaving out interest expense. Interest is tax deductible, so a company with debt pays less tax than an identical debt-free company. UFCF removes that benefit too: taxes are calculated as if there were no interest expense, a figure often called unlevered cash taxes (EBIT multiplied by the tax rate). Two companies with the same operations but different amounts of debt therefore report the same UFCF.
UFCF is generally treated as the same concept as free cash flow to the firm (FCFF). Both describe cash available to all investors before financing. Levered free cash flow is closer to free cash flow to equity (FCFE).
Unlevered Free Cash Flow Formula
The most common version starts from operating profit:
UFCF = EBIT × (1 − tax rate) + D&A − CapEx − increase in net working capital
The first term, EBIT × (1 − tax rate), is NOPAT (net operating profit after tax). That is why UFCF is sometimes summarized as NOPAT adjusted for non-cash charges and reinvestment.
- EBIT comes from the income statement and reflects profit before interest and taxes.
- Taxes are applied to EBIT, not taken from the actual tax line, so the interest tax shield is excluded.
- Depreciation and amortization (D&A) are added back because they reduce reported profit without using cash in the period.
- Capital expenditures (CapEx) are cash spent on buildings, machinery, equipment and other long-lived assets.
- Change in net working capital captures cash tied up in inventory and receivables, net of payables. Use the change between two balance sheet dates, not the working capital balance itself. An increase uses cash and is subtracted; a decrease releases cash and is added.
UFCF is rarely labeled on a company’s financial statements. Analysts calculate it from the income statement, balance sheet and cash flow statement.
EBITDA Method
When starting from EBITDA, D&A is already excluded, so there is nothing to add back:
UFCF = EBITDA − unlevered cash taxes − CapEx − increase in net working capital
The taxes here must still be based on EBIT, because depreciation is deductible for tax purposes even though EBITDA ignores it.
Net Income Method
Net income already has interest deducted, so the interest has to be put back. Because interest also lowered taxes, only the after-tax amount is added:
UFCF = net income + interest expense × (1 − tax rate) + D&A − CapEx − increase in net working capital
Adding back the full pre-tax interest figure overstates UFCF by the value of the tax shield.
From Cash Flow From Operations
Cash flow from operations already includes D&A and working capital changes, but it also reflects interest paid. A bridge from it is:
UFCF = cash flow from operations + after-tax interest expense − CapEx
Some companies classify interest paid outside operating cash flow, so check where interest sits before adjusting.
Example of Unlevered Free Cash Flow
For a hypothetical example, assume a company reports for one year:
| Item | Amount |
|---|---|
| Revenue | $1,000 |
| EBITDA | $250 |
| D&A | $50 |
| EBIT | $200 |
| Interest expense | $40 |
| Tax rate | 25% |
| CapEx | $70 |
| Increase in net working capital | $20 |
EBIT method: NOPAT = $200 × 0.75 = $150. UFCF = $150 + $50 − $70 − $20 = $110.
EBITDA method: unlevered taxes = $200 × 25% = $50. UFCF = $250 − $50 − $70 − $20 = $110.
Net income method: pre-tax income = $200 − $40 = $160; taxes = $40; net income = $120. After-tax interest = $40 × 0.75 = $30. UFCF = $120 + $30 + $50 − $70 − $20 = $110.
The company’s actual tax bill is $40, not $50. The $10 difference is the interest tax shield, and UFCF deliberately ignores it.
In this example, the UFCF margin (UFCF divided by revenue) is $110 ÷ $1,000 = 11%. It shows how much of each sales dollar becomes cash available to all capital providers and allows comparisons across companies of different sizes.
Unlevered vs. Levered Free Cash Flow
Levered free cash flow starts from UFCF and subtracts the costs of debt:
LFCF = UFCF − interest expense × (1 − tax rate) − mandatory debt repayments
Some analysts also add new borrowing, which turns the measure into free cash flow to equity. Definitions vary, so check which version a model or data provider uses.
Continuing the example, and assuming a mandatory debt repayment of $25: LFCF = $110 − $30 − $25 = $55. Half of the operating cash flow goes to lenders before shareholders have a claim on anything.
| Unlevered FCF | Levered FCF | |
|---|---|---|
| Interest | Not deducted | Deducted (after tax) |
| Debt repayments | Not deducted | Deducted |
| Taxes | As if no debt | Actual, including tax shield |
| Belongs to | All capital providers | Shareholders |
| Paired valuation | Enterprise value | Equity value |
A company can have positive UFCF and negative LFCF when its debt service exceeds what operations produce. A short period of negative LFCF may reflect a temporary situation such as a scheduled repayment. If it persists, the company has to raise new money or reduce its obligations.
How UFCF Is Used
DCF valuation. In an enterprise DCF, analysts project UFCF for several years, estimate a terminal value and discount everything at the weighted average cost of capital (WACC). WACC already includes the after-tax cost of debt, so deducting interest in the cash flows as well would count financing twice. The result is enterprise value. Subtracting net debt and other non-equity claims gives equity value.
Comparing companies. Because UFCF ignores capital structure, it allows a heavily indebted company to be compared with a debt-free competitor on operating performance alone.
Acquisitions and leveraged buyouts. A buyer usually plans to replace the target’s existing financing, so its current debt says little about the deal. Models often show UFCF both pre-transaction and post-transaction. The post-transaction figure reflects deal adjustments such as new depreciation and amortization on assets written up at acquisition (which changes taxes) or expected cost savings. Financing stays excluded in both versions, and the new debt appears only when moving to levered cash flow.
Limitations of Unlevered Free Cash Flow
- It hides debt risk. A company with large borrowings can show strong UFCF while struggling to meet interest and repayments, so its default risk does not show in UFCF alone.
- It can be managed in the short term. Delaying capital projects, cutting staff, running down inventory or stretching supplier payments all raise UFCF temporarily. Each has later costs, so a jump in one year may not reflect a better business.
- Inputs require judgment. Choices such as the tax rate, the treatment of leases and stock-based compensation, and what counts as working capital can change the result. Figures from different sources may not match.
- Interest timing differs. Interest accrued on the income statement and interest actually paid in cash can differ in a given period, which complicates the net income and operating cash flow bridges.
FAQs
Is UFCF the same as FCF?
Not always. "Free cash flow" is often calculated as cash flow from operations minus CapEx, which already reflects interest paid and is therefore a levered measure. UFCF explicitly removes financing effects, so it is usually higher for a company that has debt.
The Bottom Line
UFCF matters to analysts valuing companies, comparing businesses with different debt loads or modeling acquisitions and buyouts. It isolates operating performance from financing, which makes it the right input for enterprise DCF models. Because it hides debt risk, can be inflated temporarily and depends on judgment calls, pair it with levered free cash flow and check how each source calculates it.
