Unlevered vs Levered Free Cash Flow
Unlevered free cash flow is cash to all investors before debt; levered FCF is what's left for equity. The formulas, the difference, and why DCFs use UFCF.
Jun 15, 2026 · 7 min read
Unlevered free cash flow (UFCF) is the cash a business generates that's available to all capital providers, both debt and equity holders, before any interest or debt payments. Levered free cash flow (LFCF) is what remains for equity holders after debt obligations like interest and mandatory repayments are subtracted. The single difference is financing: unlevered FCF sits above the interest line, levered FCF sits below it. Investment banking DCFs almost always use unlevered free cash flow because it's independent of how a company is financed, so it produces enterprise value. Levered cash flow is tied to one specific capital structure and produces equity value directly.
TL;DR
- Unlevered FCF = cash to all investors before interest and debt payments; levered FCF = cash left for equity after them.
- Unlevered FCF formula: EBIT x (1 - tax rate) + D&A - change in NWC - CapEx.
- Levered FCF starts from unlevered FCF, then subtracts net interest and mandatory debt repayments.
- DCFs use unlevered FCF discounted at WACC to get capital-structure-neutral enterprise value (Wall Street Prep).
- Levered FCF discounted at cost of equity gives equity value directly but bakes in one capital structure.
What is unlevered free cash flow?
Unlevered free cash flow, also called free cash flow to the firm (FCFF), is the cash a company produces from operations after taxes and reinvestment, but before any financing effects. It belongs to every capital provider in the business: senior lenders, bondholders, preferred holders, and common shareholders. Because it ignores the capital structure entirely, it answers a clean question: how much cash does the underlying business throw off, regardless of how it's funded? That neutrality is exactly why valuation work leans on it. Two companies with identical operations but different debt loads will report the same unlevered FCF, which makes them directly comparable.
What is the unlevered free cash flow formula?
The standard build starts from EBIT (operating profit) and works down to cash. You tax EBIT, add back non-cash charges, then subtract reinvestment needs. The formula is:
Here t is the tax rate, D&A is depreciation and amortization, and ΔNWC is the change in net working capital. The EBIT x (1 - tax rate) term is often called NOPAT, net operating profit after tax. Notice interest expense never appears. That's deliberate: keeping interest out is what makes the number unlevered and available to all investors. You can also build UFCF from EBITDA by skipping the add-back of D&A, since EBITDA already excludes it, then subtracting cash taxes separately.
What is levered free cash flow?
Levered free cash flow, also called free cash flow to equity (FCFE), is the cash left over for common shareholders after the company has met all of its debt obligations. It picks up where unlevered FCF stops by subtracting net interest expense and any mandatory debt repayments, then adding back new debt drawn. A simple way to express it:
Because levered FCF is what's actually distributable to equity, it's the relevant figure for a leveraged buyout sponsor sizing returns or a dividend-paying company. The trade-off is that LFCF is specific to one capital structure: change the debt load and the number moves, so it can't be compared cleanly across differently financed firms.
Unlevered vs levered free cash flow: the comparison
The two metrics answer different questions. Unlevered FCF asks what the whole enterprise generates; levered FCF asks what equity keeps. This table lays out the contrast bankers expect you to know cold.
| Feature | Unlevered FCF (FCFF) | Levered FCF (FCFE) |
|---|---|---|
| Available to | All capital providers (debt + equity) | Common equity holders only |
| Interest expense | Excluded (above the line) | Subtracted (after-tax) |
| Debt repayments | Excluded | Subtracted |
| Discount rate | WACC | Cost of equity |
| DCF output | Enterprise value | Equity value |
| Capital structure | Neutral, comparable across firms | Specific to current financing |
| Main use | IB valuation, comps, DCF | LBO returns, dividend capacity |
Why do DCF models use unlevered free cash flow?
DCFs use unlevered free cash flow because it produces a capital-structure-neutral enterprise value and keeps the numerator and denominator consistent. Unlevered FCF belongs to all investors, so you discount it at the weighted average cost of capital (WACC), which blends the required returns of all those investors (Wall Street Prep). Cash flows to everyone, discount rate from everyone: the math lines up.
The alternative, a levered DCF, discounts levered FCF at the cost of equity and lands directly on equity value. It works, but it's fiddlier because the capital structure shifts every year as debt is paid down, so the cost of equity should technically change too. The unlevered approach sidesteps that. You value the enterprise once, then bridge to equity value by subtracting net debt, which is cleaner and easier to compare across companies. For more on the full mechanics, see walk me through a DCF and the role of WACC as the discount rate.
How does the EBIT to unlevered FCF build work?
You start at EBIT because it's the last profit line before financing enters the picture. Tax it at the marginal rate to get NOPAT, add back D&A because those charges reduced EBIT but didn't cost cash, then subtract the two real cash drains on a growing business: capital expenditures and increases in net working capital. The result is the cash the operating business actually generated for all investors.
If a question gives you net income instead of EBIT, you have to reverse the financing: add back after-tax interest expense to undo the leverage, since net income already deducted it. Skipping that step is one of the most common interview slips, because it leaves the cash flow contaminated by capital structure when you wanted it clean. The whole exercise ties back to how the three financial statements link together through the cash flow statement.
Frequently Asked Questions
What is the difference between unlevered and levered free cash flow?
Unlevered free cash flow is the cash available to all capital providers before any debt payments, while levered free cash flow is what's left for equity holders after interest and mandatory debt repayments. The dividing line is financing: unlevered sits above interest, levered sits below it.
What is the unlevered free cash flow formula?
UFCF = EBIT x (1 - tax rate) + D&A - change in net working capital - CapEx. The EBIT x (1 - tax rate) piece is NOPAT. Critically, interest expense is excluded, which is what keeps the figure available to all investors.
Why does a DCF use unlevered free cash flow instead of levered?
Because unlevered FCF is capital-structure neutral, it produces enterprise value when discounted at WACC and is comparable across companies with different debt loads. The cash flows belong to all investors, matching WACC, which reflects all investors' required returns.
What discount rate do you use for levered free cash flow?
The cost of equity. Levered FCF is specific to common shareholders, so it's discounted at the return equity investors require, and the output is equity value directly rather than enterprise value.
Is unlevered free cash flow the same as FCFF?
Yes. Unlevered free cash flow and free cash flow to the firm (FCFF) are the same concept: cash to all capital providers before financing. Likewise, levered free cash flow is free cash flow to equity (FCFE).
Does unlevered free cash flow include interest expense?
No. Interest expense is deliberately excluded so the cash flow reflects what the business generates before any financing decisions. If you build UFCF from net income, you must add after-tax interest back to strip out the leverage.
Sources
- Unlevered Free Cash Flow (UFCF) Formula + Calculator - Wall Street Prep (checked June 2026)
- FCFF vs FCFE - Corporate Finance Institute (checked June 2026)
- Unlevered Free Cash Flow - Definition, Formula & DCF Use - Corporate Finance Institute (checked June 2026)
- Free Cash Flows (FCF) - Unlevered vs Levered - Financial Edge (checked June 2026)
- Why use unlevered FCF but discount with WACC - Wall Street Oasis (checked June 2026)