Levered Free Cash Flow (LFCF) measures the cash available to equity holders after all operating expenses, taxes, reinvestment needs, and interest payments. It represents the actual cash that can be distributed to shareholders or reinvested in the business.

What is Levered Free Cash Flow?

Definition

Cash available to equity holders
After debt servicing and reinvestments
Used for dividends and share buybacks
Key equity valuation metric

Formula

LFCF = EBIT × (1-tax) + Depreciation - CapEx - ?Working Capital - Interest × (1-tax)
LFCF = CFO - CapEx + Net Debt Reduction
Can be positive or negative
Equity-focused cash flow measure

Levered vs Unlevered Free Cash Flow

Cash Flow Perspectives

Different valuation approaches

Levered FCF:

After interest and debt payments
Available to equity holders
Used in equity valuation
Discounted at cost of equity

Unlevered FCF:

Before interest payments
Available to all capital providers
Used in enterprise valuation
Discounted at WACC

LFCF in Equity Valuation

Dividend Discount Model:

LFCF used as dividend proxy
Discounted at required equity return
Determines intrinsic share value
Accounts for payout capacity

LFCF Yield:

LFCF ÷ Share Price
Equity return measure
Compared to required return
Valuation indicator

Interpreting LFCF Values

LFCF Level	Interpretation	Shareholder Impact	Strategic Implications
Positive LFCF	Generating cash for shareholders	Dividends and buybacks possible	Strong equity value
Zero LFCF	Breaking even for equity	Limited shareholder distributions	Maintain operations
Negative LFCF	Consuming equity capital	Dilution or cuts required	Restructure or raise capital

Factors Affecting LFCF

Positive Factors:

Strong operating profitability
Efficient working capital management
Low capital expenditure requirements
Tax-advantaged debt financing

Negative Factors:

High interest expense
Heavy capital expenditures
Working capital increases
High tax rates

LFCF and Capital Structure

Debt Impact:

Interest payments reduce LFCF
Tax shields benefit LFCF
Debt repayments affect LFCF
Optimal leverage maximizes LFCF

Equity Impact:

Share issuances increase LFCF
Share buybacks decrease LFCF
Dividends reduce LFCF
Retained earnings increase LFCF

LFCF vs Dividends

LFCF:

Maximum sustainable dividends
After all obligations
May exceed actual dividends
Used for valuation

Actual Dividends:

Actual cash paid to shareholders
May be less than LFCF
Management discretion
Market expectations

LFCF Limitations

Accounting Issues:

Working capital changes volatile
CapEx classification varies
Interest expense timing
Tax rate assumptions

Business Context:

Growth stage considerations
Industry capital intensity
Cyclical business effects
Financing decisions impact

LFCF in Investment Decisions

Value Investing:

Compare LFCF to market value
Assess LFCF yield
Evaluate payout ratios
Focus on sustainable cash generation

Growth Investing:

Monitor LFCF trends
Assess reinvestment needs
Evaluate growth sustainability
Compare to industry peers

Key Takeaways for Levered FCF

LFCF measures the cash available to equity holders after all obligations
Positive LFCF indicates capacity for dividends and share buybacks
LFCF differs from unlevered FCF by accounting for debt financing
LFCF is used in equity valuation models like the dividend discount model
Capital structure decisions significantly impact LFCF
LFCF can be more volatile than unlevered FCF due to financing
Comparing LFCF trends helps assess shareholder value creation
Understanding LFCF helps in making informed equity investment decisions

Levered Free Cash Flow Calculator

Operating Cash Flow Data

Financing Data

Levered FCF Results

Cash Flow Analysis

Business Insights

Understanding Levered Free Cash Flow