What is Levered Free Cash Flow & How Do You Calculate It?

In the world of finance and investment, understanding cash flow is like knowing the secret handshake at a posh club—it's essential for getting the real insider knowledge. Enter Levered Free Cash Flow (LFCF), a key player in this exclusive club. But what exactly is LFCF, and how does one calculate it without breaking a sweat? Buckle up as we dive into the ins and outs of Levered Free Cash Flow, where we’ll also touch on its more refined cousin, Unlevered Free Cash Flow (UFCF), and why this all matters in your financial quest.

What is Levered Free Cash Flow (LFCF)?

Levered Free Cash Flow is essentially the amount of cash a company has left over after meeting its financial obligations, including interest payments on debt. In simpler terms, it’s the cash that remains after a company has paid its bills and serviced its debt. LFCF is crucial for assessing a company's financial health, particularly from the perspective of its debt holders and equity investors who want to know how much cash is available to cover the cost of debt and potentially distribute dividends.

Imagine you’re running a lemonade stand. After buying lemons, sugar, cups, and paying your stand rental, you still need to settle any loans you took out to get started. The cash you have left after all these payments is akin to LFCF. It’s the money that’s truly available for reinvestment or distribution to shareholders after all financial obligations have been met.

How to Calculate Levered Free Cash Flow

Calculating Levered Free Cash Flow might sound like a complicated formula, but it’s quite straightforward once you break it down. Here’s a step-by-step guide to make it less of a brain-teaser and more of a breeze:

1. Start with Net Income: This is the profit a company makes after all expenses, taxes, and interest payments have been subtracted from total revenue. It’s essentially your starting point.
2. Add Back Non-Cash Expenses: These include depreciation and amortization. While they reduce net income on paper, they don’t actually cost the company any cash, so we add them back to get a clearer picture of cash flow.
3. Subtract Capital Expenditures (CapEx): These are the investments made in physical assets like machinery or property. While CapEx is necessary for growth, it reduces the cash available for other purposes, so we subtract it.
4. Adjust for Changes in Working Capital: Working capital is the difference between current assets and current liabilities. If a company’s working capital increases, it means more cash is tied up in operations, which we need to subtract. Conversely, if it decreases, we add that amount back.
5. Subtract Interest Payments: Since LFCF takes debt into account, you need to deduct any interest expenses related to outstanding debt.

The formula looks like this:

LFCF = Net Income + Depreciation + Amortization − CapEx − Change in Working Capital − Interest Payments

This gives you the Levered Free Cash Flow, reflecting the cash remaining after all obligations are met.

Difference Between Levered Cash Flow and Unlevered Free Cash Flow (UFCF)

It’s time to introduce Unlevered Free Cash Flow (UFCF), the sibling of LFCF. While LFCF considers the impact of debt on cash flow, UFCF provides a clearer view of a company’s cash flow potential without the influence of debt. This is why UFCF is often used in valuation models to assess the overall performance of a company, independent of its capital structure.

Here's a quick breakdown of the key differences:

• Debt Influence: LFCF is affected by debt payments (interest and principal), while UFCF is not. UFCF assumes a debt-free scenario, providing a purer look at cash flow generated by operations.
• Interest Payments: UFCF does not subtract interest payments since it evaluates the cash flow before financing costs, making it more focused on operational efficiency.
• Usage: LFCF is particularly useful for understanding the cash available to equity and debt holders, especially when evaluating a company’s ability to pay off existing debt. UFCF, on the other hand, is used in Discounted Cash Flow (DCF) analysis to value a company by projecting future cash flows without the distortions of capital structure.

Why is LFCF Important?

Understanding Levered Free Cash Flow is akin to having a financial crystal ball. It’s not just a number—it’s an indicator of a company’s ability to manage its debt and generate cash for its stakeholders. Here’s why LFCF is a big deal:

1. Debt Management: Investors and analysts use LFCF to assess how well a company can meet its debt obligations. A strong LFCF suggests that the company can comfortably handle its debt payments and still have cash left for other purposes.
2. Valuation: For equity holders, LFCF provides insight into how much cash might be available for dividends or reinvestment. It’s a crucial metric in assessing the potential returns on investment.
3. Financial Health: Positive LFCF signals financial stability, while negative LFCF might indicate financial strain or inefficiencies in cash management.
4. Investment Decisions: LFCF helps investors evaluate whether a company is a worthwhile investment. A consistent and growing LFCF can be a good indicator of long-term financial health and operational success.

How to Get LFCF Data from Intrinio

Now that we’ve navigated the intricacies of LFCF, you might be wondering where to find this golden nugget of financial information. That’s where Intrinio comes in. Intrinio provides a robust suite of financial data and tools, including Levered Free Cash Flow metrics.

To get LFCF data from Intrinio:

1. Sign Up: First, you’ll need an account with Intrinio. Visit our website and click to create an account in the upper right hand corner.
2. Browse Data Feeds: Once you’re in, browse the financial data feeds across the top of our website. Intrinio offers various data packages, including fundamental data which covers LFCF.
3. Chat to Request a Trial: We offer 2-week free trials, completely risk free. You can fill out a consultation form or chat us live to request one.
4. Query the API: If you're a tech-savvy individual or developer, you can use the Intrinio API to pull LFCF data directly into your systems or applications. Our API documentation will guide you through the process.
5. Get data downloads: For those who prefer a more visual approach, Intrinio enables you to view and analyze LFCF and other financial metrics with ease via CSV downloads.
6. Consult Support: If you hit any snags, Intrinio’s customer support is there to help you navigate their offerings and get the data you need.

So there you have it—Levered Free Cash Flow demystified! Whether you’re analyzing a company’s financial health or just trying to impress at your next investment meeting, understanding LFCF is crucial. And with tools like Intrinio at your disposal, accessing this data has never been easier. Here’s to making informed investment decisions and leveraging every dollar of free cash flow to its fullest potential.

‍