Free Cash Flow · 2026-07-07

What Is Free Cash Flow? UFCF vs LFCF Explained Simply

A clear explanation of free cash flow — what it is, how unlevered and levered free cash flow differ, and why investors watch it more closely than profit.

Free cash flow (FCF) is the cash a business generates after paying its operating costs and taxes and making the investments needed to sustain and grow — the money genuinely left over for the people who fund the business. It is the number investors and lenders trust most, because unlike profit it cannot be shaped by accounting choices: cash either arrived or it didn't. There are two versions, and knowing which one you're looking at matters.

Unlevered free cash flow (UFCF)

Unlevered free cash flow is the cash available to all capital providers — both debt and equity — before any financing is considered. The formula is NOPAT (operating profit after tax) plus depreciation and amortisation, minus capital expenditure, minus the increase in working capital. Because it ignores how the business is financed, UFCF is the input to enterprise-value DCF valuation and the cleanest measure of operating cash generation.

Levered free cash flow (LFCF)

Levered free cash flow is what remains for shareholders after debt is serviced — UFCF minus interest and mandatory debt repayments. LFCF is the cash a company could actually distribute to equity holders, so it matters for dividend capacity and equity returns. The difference between UFCF and LFCF is simply the cost of the company's borrowing.

Why the distinction matters

Value a whole business (enterprise value) with unlevered cash flow; assess returns to shareholders with levered cash flow. Mixing them up — for example discounting levered cash flow at WACC — double-counts the effect of debt and produces the wrong answer. A good model shows the bridge from UFCF to LFCF explicitly, so the effect of financing is transparent.

Why investors prefer FCF

Profit includes non-cash items and timing effects; free cash flow strips them out and shows the money the business actually frees up. A company can be profitable yet cash-negative if it ties up cash in receivables, inventory and CAPEX — which is exactly why free cash flow, not net income, is the number that predicts whether a business can fund itself, pay down debt or return capital.

A common point of confusion

Free cash flow is often muddled with operating cash flow and with net cash movement. Operating cash flow stops after working capital and does not deduct CAPEX, so it overstates the cash truly available. Net cash movement, from the bottom of the cash flow statement, includes financing — equity raised, debt drawn and repaid, dividends — so it answers a different question entirely. Free cash flow deliberately sits between the two: after CAPEX, before financing. Knowing which of the three a figure represents prevents a great deal of misreading.

Why one year can mislead

A single year's free cash flow can be distorted by a large one-off CAPEX project or a swing in working capital, so it pays to look at several years together. A multi-period forecast smooths these lumps and shows the underlying cash-generating power of the business, which is what investors and lenders actually care about.

Forecast free cash flow free

The EasyFinancialModels Free Cash Flow Forecasting tool builds both unlevered and levered free cash flow from your revenue, cost, CAPEX and working-capital assumptions, and shows the full bridge between them via the debt schedule — as an editable, formula-linked Excel workbook. It's free for a 3-year forecast, monthly to annual, with no sign-up.

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