Unlevered Free Cash Flow Formula: Example & Interview Practice
How do you calculate unlevered free cash flow?
UFCF = EBIT × (1 − tax rate) + D&A − capital expenditures − increase in operating working capital. It is a cash-flow measure before financing, so interest and debt repayments are excluded.
The formula connects operating profit to the cash generated after reinvestment. It is useful for an enterprise DCF when paired with an appropriate WACC. Definitions and tax treatment must be consistent with the valuation purpose.
Walk from EBIT to cash
Tax EBIT to estimate after-tax operating profit. Add back depreciation and amortization because they reduced earnings without being current-period cash payments. Subtract capital expenditures and investment in operating working capital. Cash taxes can differ from a simplified EBIT-based tax estimate.
Original worked example
A company has $90 million EBIT, $18 million D&A, $26 million capex and a $12 million increase in operating working capital. At a 25% tax rate, after-tax operating profit is 90 × 75% = $67.5 million. UFCF is 67.5 + 18 − 26 − 12 = $47.5 million. All amounts are in millions.
Why EBITDA is not cash flow
EBITDA leaves out cash taxes, capital expenditures and working-capital investment. Adding back D&A does not mean assets are free to replace. A growing company can have rising EBITDA and weak cash generation if reinvestment absorbs the cash.
Why interest is excluded
Unlevered cash flow belongs to debt and equity providers together. Subtracting interest while discounting at WACC mixes an after-financing cash flow with a before-financing valuation framework. For an equity cash-flow approach, explicitly include financing flows and use the cost of equity.
Working-capital signs
An increase in operating working capital uses cash; a decrease releases cash, all else equal. Operating working capital generally excludes cash and financing debt. A $12 million decrease would therefore be added, changing this example’s UFCF to $71.5 million.
Put it into practice
Work through an original scenario, check the calculation and concept, then try fresh inputs.
Start this practice exercise →Related guides
- Walk Me Through a DCF: Interview Answer & Worked Example
- Enterprise Value vs Equity Value: Bridge, Example & Practice
Prepared by Accretive Thinking. Original fictional examples. Calculations checked; qualified expert review pending. Educational practice, not investment advice.