What is Levered Free Cash Flow?
Levered Free Cash Flow (LFCF) is a financial metric that measures the amount of cash a company generates after deducting all expenses, including interest payments on debt. It provides insight into the company’s ability to generate cash flow that can be used to pay off its debt obligations, make investments, or distribute to shareholders.
LFCF takes into account the company’s leverage, which refers to the use of debt to finance its operations. By subtracting interest payments from the cash flow, LFCF reflects the cash available to the company’s equity holders.
LFCF is an important measure for investors and analysts as it indicates the company’s ability to generate cash flow that is not tied to its debt obligations. A positive LFCF indicates that the company has sufficient cash flow to cover its debt payments and potentially invest in growth opportunities.
Calculating LFCF involves several steps. First, the company’s net income is adjusted for non-cash expenses such as depreciation and amortization. Then, changes in working capital and capital expenditures are taken into account. Finally, interest expenses are subtracted to arrive at the levered free cash flow figure.
Overall, Levered Free Cash Flow is a valuable tool for investors and analysts to assess a company’s financial performance and its ability to generate cash flow that can be used for various purposes.
Calculation of Levered Free Cash Flow
Levered Free Cash Flow (LFCF) is a financial metric that measures the amount of cash a company generates after deducting interest expenses and taxes, and taking into account the company’s debt levels. It is a useful tool for investors and analysts to assess the financial health and profitability of a company.
The calculation of Levered Free Cash Flow involves several steps:
Step 1: Calculate Operating Cash Flow (OCF)
The first step in calculating Levered Free Cash Flow is to determine the company’s Operating Cash Flow (OCF). OCF is the cash generated by the company’s core operations and is calculated by subtracting the company’s operating expenses, such as cost of goods sold, selling and administrative expenses, and depreciation, from its revenue.
Step 2: Calculate Tax Shield
The next step is to calculate the Tax Shield, which represents the tax savings resulting from the company’s interest expenses. The Tax Shield is calculated by multiplying the company’s interest expenses by its tax rate.
Tax Shield = Interest Expenses * Tax Rate
Step 3: Calculate Levered Free Cash Flow
Finally, Levered Free Cash Flow is calculated by subtracting the company’s interest expenses, taxes, and capital expenditures from its Operating Cash Flow, and adding back the Tax Shield.
The resulting Levered Free Cash Flow figure represents the amount of cash available to the company’s investors and creditors after accounting for its debt obligations and tax liabilities. It can be used to assess the company’s ability to generate cash, repay debt, pay dividends, and invest in growth opportunities.
A company with a positive Levered Free Cash Flow is generally considered financially healthy, as it indicates that the company is generating more cash than it needs to cover its debt and tax obligations. On the other hand, a negative Levered Free Cash Flow may indicate financial distress, as it suggests that the company is not generating enough cash to meet its financial obligations.
| Term | Formula |
|---|---|
| Operating Cash Flow (OCF) | |
| Tax Shield | Interest Expenses * Tax Rate |
| Levered Free Cash Flow |
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.