Unlevered free cash flow
6 min read · updated July 2, 2026
Unlevered free cash flow (UFCF) is the cash a business throws off from its operations before it pays a cent of interest. That's the whole idea behind the word "unlevered." Strip out the effect of debt, and what's left is the cash that belongs to everyone who funded the company: lenders and shareholders alike.
That one property is why it sits at the center of a DCF. It's the number you project, discount, and sum to get enterprise value. Get the build wrong and the rest of the model is pointing at the wrong answer.
The formula
Read it left to right and each piece has a reason to be there.
Start with EBIT, then tax it
EBIT is operating profit before interest. You start here on purpose. Net income sits below interest expense, so it already reflects how the company is financed. EBIT doesn't. It's the profit the operations produce regardless of the capital structure, which is exactly what you want when the goal is cash for all investors.
Then you tax it: . This is sometimes called NOPAT (net operating profit after tax). Notice you're taxing EBIT directly, not taxing EBIT-minus-interest the way the real income statement does. You're deliberately ignoring the interest tax shield here, because the benefit of debt gets captured later in the discount rate, not in the cash flow. More on that below.
Add back D&A
Depreciation and amortization got subtracted to compute EBIT, but it's a non-cash charge. No cash left the building this year. So you add it back. The company recorded the expense on paper; the actual cash went out the door years ago when the asset was bought.
Subtract the change in net working capital
Net working capital is the cash tied up in running the business day to day: receivables and inventory, less payables. When a growing company sells more, it usually has to carry more inventory and wait longer to collect from customers. That's cash locked up, so an increase in working capital is a use of cash and you subtract it.
The (delta) matters. It's the change year over year, not the level. If NWC goes up by 20, that's 20 of cash consumed.
Subtract CapEx
Capital expenditures are the real cash spent on property, plant, and equipment to keep the business running and growing. It's a cash outflow that never touched EBIT (only its depreciation did, years later), so you subtract the full amount here.
Look at the last three terms together. You added back D&A because it wasn't a real cash cost, then you subtracted CapEx and the working-capital change because those are real cash costs the income statement mostly ignores. UFCF is EBIT dragged back toward what actually happened to the bank account.
Why "unlevered" is the point
Two companies can run identical operations and generate identical EBIT. One is financed with a pile of debt, the other with none. Their unlevered free cash flow is the same, because we build it before interest. Their levered cash flow, the cash left for shareholders after debt service, is very different.
That's the feature, not a bug. Unlevered FCF lets you value the business first and worry about the financing second. And because the cash belongs to all capital providers, you discount it at the blended rate all of them require: the weighted average cost of capital (WACC). Debt holders and equity holders both have a claim, so you use the return both of them demand.
Using levered free cash flow (cash after interest) and then discounting it at WACC. This is the classic DCF error. Levered cash flow belongs to equity holders only, so it must be discounted at the cost of equity, not WACC. Pair them correctly:
| Cash flow | Whose cash is it? | Discount rate | Gets you to | |---|---|---|---| | Unlevered FCF | All capital providers | WACC | Enterprise value | | Levered FCF | Equity holders only | Cost of equity | Equity value |
Discounting unlevered FCF at WACC gives you enterprise value. Discounting levered FCF at the cost of equity gives you equity value directly. Cross the wires and your number is meaningless.
A clean worked example
Say next year the operations look like this:
| Line | Value | |---|---| | EBIT | $200 | | Tax rate | 25% | | D&A | $40 | | Increase in NWC | $20 | | CapEx | $60 |
Walk the formula:
Tax the $200 of EBIT at 25% to get $150 of after-tax operating profit. Add back the $40 of non-cash D&A to get $190. Then pay for reality: $20 more tied up in working capital and $60 of CapEx. You're left with $110 of cash that any investor in the business could, in theory, be paid.
UFCF is not EBITDA
Beginners sometimes treat EBITDA as if it were free cash flow. It isn't, and the example shows why. EBITDA here would be $240 (EBIT plus D&A). But EBITDA ignores three things that are very real: taxes, the cash sunk into working capital, and CapEx. UFCF charges you for all of them. That gap, $240 versus $110, is the difference between a rough proxy and the cash a company can actually hand to its investors.
When someone says "walk me through unlevered free cash flow," recite the build in one clean breath: start with EBIT, tax it, add back D&A, subtract the change in working capital, subtract CapEx. Then, without being asked, add the why: it's before interest, so it belongs to all capital providers, which is why it pairs with WACC. Saying the formula is table stakes. Volunteering the pairing logic in the same breath is the depth that separates you in a Superday.
Glossary
New to the lingo? Every term used above, in plain English.
- Unlevered free cash flow
- The cash a business generates before any debt payments, so it belongs to all investors, both lenders and shareholders. This is the cash flow used in a DCF.
- FCF (Free Cash Flow)
- The cash a company has left after paying for its operations and its investments. It is the cash actually available to investors.
- EBIT (Earnings Before Interest and Taxes)
- A company operating profit before interest and taxes are taken out. It measures how much the core business earns regardless of how it is financed.
- D&A (Depreciation and Amortization)
- Spreading the cost of long-lived assets over the years they are used. Depreciation is for physical assets, amortization for intangible ones. Both are non-cash expenses.
- Non-cash charge
- An expense that lowers reported profit but involves no cash leaving the company, such as depreciation or amortization. It gets added back on the cash flow statement.
- Net working capital (NWC)
- The short-term money tied up in running the business, roughly current assets like inventory and receivables minus current liabilities like payables. Growth in it uses up cash.
- CapEx (Capital Expenditures)
- Cash a company spends to buy or upgrade long-lived assets like equipment, factories, or technology. It is an investment in the business, not a day-to-day expense.
- WACC (Weighted Average Cost of Capital)
- The blended rate a company pays to fund itself with both debt and equity. In a DCF it is the discount rate used to bring future cash back to today.
- Cost of equity
- The return shareholders require to own a company stock, given its risk. Usually estimated with CAPM, and it is always higher than the cost of debt.
- EV (Enterprise Value)
- The value of a company’s whole operations, to every investor including lenders and shareholders. It does not depend on how the company is financed.
- Equity Value
- The slice of a company that belongs to its shareholders. For a public company this is the market capitalization (share price times shares outstanding).
- Tax shield
- The tax a company saves because an expense is deductible. Depreciation, for example, lowers taxable income, so it saves cash on taxes even though it is non-cash.
- EBITDA
- Earnings Before Interest, Taxes, Depreciation, and Amortization. A rough proxy for a company’s operating cash profit, before financing and accounting choices.
Make it stick
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