Free Cash Flow · 2026-07-07 · 6 min read

Written and reviewed by Project Financial Advisor · FCA · CGMA · ACMA — Chartered Accountant

Unlevered vs Levered Free Cash Flow: The Difference and When to Use Each

Unlevered free cash flow (UFCF) is the cash a business generates before any debt is serviced; levered free cash flow (LFCF) is what's left for shareholders after interest and debt repayments. The bridge between them is the company's debt service. Choosing the right one is not a detail — using the wrong measure in a valuation double-counts the effect of leverage and gives you the wrong number.

Unlevered free cash flow

UFCF = NOPAT + depreciation and amortisation − CAPEX − increase in working capital. It deliberately excludes financing, so it represents the cash available to all providers of capital. Because it is capital-structure-neutral, UFCF is the correct input for an enterprise-value DCF and the fairest way to compare the operating cash generation of companies with different debt levels.

Levered free cash flow

LFCF = UFCF − interest − mandatory debt repayments (and sometimes + net new borrowing). It is the cash that actually belongs to equity holders after the lenders are paid, so it drives dividend capacity, share buybacks and the equity return. LFCF answers 'how much cash can this business return to its owners?'

The bridge

The gap between UFCF and LFCF is the after-tax cost of the company's borrowing plus principal repayments. Showing this bridge explicitly — UFCF at the top, debt service in the middle, LFCF at the bottom — makes the impact of leverage visible, which is exactly what lenders and equity investors want to see.

Which one to use

Value the enterprise and compare across companies with unlevered cash flow discounted at WACC. Assess equity returns, dividends and debt capacity with levered cash flow. The classic mistake is discounting levered cash flow at WACC — WACC already accounts for debt, so this counts leverage twice.

A worked bridge

Start with $2m of unlevered free cash flow. The company pays $300,000 of after-tax interest and makes $500,000 of scheduled debt repayments during the year. Levered free cash flow is $2m − $0.3m − $0.5m = $1.2m — the cash actually available to shareholders. The $800,000 difference is the full cost of the company's borrowing that year. Stack these three lines and the effect of leverage on equity cash is immediately clear.

How leverage cuts both ways

Debt amplifies equity outcomes. When the business does well, levered free cash flow grows faster than unlevered because the debt service is fixed. When it does poorly, that same fixed service eats a larger share of a smaller cash flow — and can turn positive unlevered cash into negative levered cash. Modelling both, rather than one, is how you see that risk before it bites.

See both, bridged, for free

The EasyFinancialModels Free Cash Flow Forecasting tool builds unlevered free cash flow, then walks down through the debt schedule to levered free cash flow, with every line linked and editable in Excel. It's free for a 3-year forecast, monthly to annual — model your operating and financing cash in one place.

The UFCF formula and the LFCF formula, side by side

Written out: UFCF = NOPAT + D&A − CAPEX − ΔWC, and LFCF = UFCF − after-tax interest − principal. Two short formulas, but they answer different questions — how much cash the business generates, versus how much of it survives the debt.

UFCF to LFCF: a worked walk

Same business, different audience. A lender reads the $5.0M and asks whether it covers service comfortably. A shareholder reads the $3.0M, because dividends and buybacks come out of levered cash, not unlevered.

Is FCF the same as UFCF?

Usually — but not reliably enough to assume. When a screener, report or dataset says 'free cash flow' without qualification, it most often means the unlevered figure. Equity-focused sources sometimes mean levered. The one-second check: if interest and debt repayments have already been deducted, you are looking at LFCF. Comparing a levered number from one source against an unlevered number from another is one of the quieter ways an analysis goes wrong.

Which one belongs in a valuation

UFCF pairs with WACC in an enterprise DCF, because both describe the whole capital base. LFCF pairs with the cost of equity in an equity DCF. Cross the pairs — discounting levered cash flow at WACC, say — and the debt gets double-counted, which quietly inflates or deflates the answer. This pairing rule is the single most practical reason the UFCF/LFCF distinction exists.

Where each shows up in practice

LBO models live on levered free cash flow, because debt paydown is the engine of the return. Credit analysis reads unlevered cash flow against debt service for coverage. Dividend policy is set from levered cash. And enterprise valuations — most DCFs you will meet — run on unlevered. Knowing which room you are in tells you which number to bring.

Frequently asked questions

What is the UFCF formula?

UFCF = NOPAT + depreciation and amortisation − CAPEX − increase in working capital, where NOPAT is EBIT × (1 − tax rate). It measures the cash available to all capital providers before any financing effects.

What is the LFCF formula?

LFCF = UFCF − after-tax interest − scheduled principal repayments. It is the cash left for equity holders once lenders have been serviced — the stricter measure of what a business can actually distribute.

Is FCF the same as UFCF?

Usually but not always. When a report says free cash flow without qualification it most often means unlevered FCF, but equity analysts sometimes mean levered. Check whether interest and debt repayments have been deducted before comparing figures across sources.

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More Free Cash Flow guides

What Is Free Cash Flow? UFCF vs LFCF Explained Simply · EBITDA to FCF: How to Calculate Free Cash Flow (Formula) · Why Free Cash Flow Matters More Than Profit · Free Cash Flow Conversion: What It Is and What's a Good Rate · How to Model Tax-Loss Carryforwards (NOLs) in a Financial Model

About the author

Every model is built and reviewed by the project's Financial Advisor — a Fellow Chartered Accountant (FCA) of the Institute of Chartered Accountants of Pakistan (ICAP), Chartered Global Management Accountant (CGMA) and Associate Chartered Management Accountant (ACMA) with around two decades of corporate finance, audit and accounting experience, designing investor-grade financial models across industries. Full credentials and background are available on LinkedIn. More about the author →

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