Free Cash Flow · 2026-07-07

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

Unlevered vs levered free cash flow explained — the formulas, the bridge between them, and which one to use for valuation versus equity returns.

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.

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