Discover the Power of Levered Free Cash Flow
Levered free cash flow (LFCF) is the amount of money a company has left after settling all of its financial obligations. LFCF offers insights into the available cash that a company can use to pay dividends or reinvest into its growth activities.
Key Takeaways
- Levered free cash flow indicates the cash left after all debts and bills are paid.
- It’s possible to have a negative LFCF, even with positive operating cash flow.
- Companies can utilize LFCF for dividends, stock buybacks, or reinvestments.
- Unlevered free cash flow (UFCF) accumulates before settling debts and obligations.
Here is the formula to calculate Levered Free Cash Flow (LFCF):
LFCF = EBITDA - change in NWC - CapEx - Mandatory debt payments
Where:
- EBITDA = Earnings before interest, taxes, depreciation, and amortization
- ∆NWC = Change in net working capital
- CapEx = Capital expenditures
- Mandatory debt payments
Transforming these figures into the LFCF formula helps business analysts evaluate the financial health and stability of an enterprise.
How Levered Free Cash Flow Benefits You
LFCF is an important metric that showcases a company’s capability to grow its business and reward shareholders. It also plays a pivotal role in obtaining additional funding. Here’s what LFCF can tell you:
- Financial Stability: A company with a strong LFCF is less likely to encounter difficulty securing financing.
- Investor Insight: Negative LFCF doesn’t always mean failure. It might reflect substantial investments poised for future gains.
- Cash Utilization: Investors watch how companies allocate their LFCF to dividends, reinvestments, or growth opportunities.
- Debt Management: Low LFCF might disadvantage companies when seeking new loans or capital injections.
LFCF vs. UFCF: Understanding the Difference
Levered Free Cash Flow measures available cash after debts and obligations, while Unlevered Free Cash Flow calculates cash reserves before handling debts. UFCF is typically calculated as:
UFCF = EBITDA - CapEx - working capital - taxes
Market experts often regard LFCF as a critical measure of profitability. LFCF focuses primarily on shareholder returns, differing from UFCF, which extends consideration to debtholders, portraying a broader financial picture.
Related Terms: Unlevered Free Cash Flow (UFCF), Dividends, Capital Expenditures, Debt Payments, EBITDA.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## Levered Free Cash Flow (LFCF) refers to which of the following?
- [ ] Cash flow before operating expenses are deducted
- [ ] Revenue generated from core business operations
- [x] The amount of cash a company has after meeting its financial obligations
- [ ] The total revenue after deducting cost of goods sold
## What is the primary difference between Levered Free Cash Flow (LFCF) and Unlevered Free Cash Flow (UFCF)?
- [ ] LFCF includes dividend payments whereas UFCF does not
- [ ] LFCF does not account for growth whereas UFCF does
- [ ] LFCF includes taxes while UFCF ignores them
- [x] LFCF accounts for debt repayments while UFCF does not
## Which of the following accurately impacts Levered Free Cash Flow?
- [ ] Only equity financing
- [x] Debt servicing costs
- [ ] Only environmental costs
- [ ] Fixed assets
## Levered Free Cash Flow (LFCF) is important to which finance-related group?
- [ ] Employees expecting bonuses
- [ ] Customers of the company
- [ ] Board of Directors' decisions on vendor selections
- [x] Creditors assessing loan repayment ability
## How is Levered Free Cash Flow (LFCF) generally calculated?
- [ ] Revenue minus gross margin
- [ ] Earnings Before Interest, Taxes, and Depreciation (EBITD) minus capital expenditures
- [ ] Net Income plus depreciation and non-cash expenses
- [x] Operating Cash Flow minus capital expenditures and debt repayments
## An increase in Levered Free Cash Flow could indicate which possibility?
- [ ] The company is increasing leverage
- [x] The company has higher available cash after debt obligations
- [ ] Decreased overall profitability
- [ ] Delays in debt repayments
## Levered Free Cash Flow (LFCF) provides insight into which aspect of a company's financial health?
- [ ] Equity returns
- [ ] Dividend potential
- [ ] Asset liquidity
- [x] Cash after meeting all financial obligations
## Why might an investor prefer a company with higher Levered Free Cash Flow?
- [ ] It means the company has higher gross margins
- [x] It indicates greater potential for sustaining operations and payments
- [ ] Shows company willingness to take on more debt
- [ ] Indicates fewer capital expenditures
## When comparing companies, why might Levered Free Cash Flow (LFCF) be a critical metric?
- [ ] It highlights differences in product pricing strategies
- [ ] It provides information on geographic revenue differences
- [ ] It equates net interest margins
- [x] It reveals the sufficiency of cash flows after debt obligations
## Which scenario will likely reduce Levered Free Cash Flow (LFCF)?
- [ ] Increase in equity financing
- [ ] Decrease in regulatory costs
- [x] Higher debt servicing and interest payments
- [ ] Reduced capital expenditures
