Last Updated July 1, 2026
Cash flow is one of the most helpful metrics for evaluating a company’s financial health. Still, not all cash flow measurements tell the same story. Depending on your goal, you may need to understand how much cash a business generates from its operations or how much cash remains after it pays its debts.
That’s why you need to know the difference between levered vs. unlevered free cash flow. They sound similar, but each calculation serves a different purpose.
Learn about the relationship between unlevered and levered free cash flow and why it’s helpful to analyze both metrics.
Key Takeaways
- The primary difference between levered vs. unlevered free cash flow is that levered free cash flow includes debt payments, while unlevered free cash flow measures cash before financing obligations.
- The levered free cash flow formula measures cash available after debt payments, while the unlevered free cash flow formula focuses on operating performance without considering capital structure.
- Investors often use unlevered free cash flow to compare companies with different debt levels, while levered free cash flow helps evaluate shareholder value and available cash.
- Analyzing both levered and unlevered free cash flow provides a more complete picture of a company’s financial health, operating performance, and long-term stability.
What Is Levered Free Cash Flow?
Levered free cash flow tells owners and investors how much cash is available after a company makes required payments, including:
- Operating expenses
- Capital expenditures
- Debt obligations
You should still check a company’s revenue reports, but when you want to understand a business’s true financial health, cash flow tells a more complete story.
Because levered free cash flow accounts for debt payments, it reflects the cash that remains after lenders have been paid. This makes it a particularly useful small business KPI for equity investors who want to understand how much cash could be distributed to shareholders or reinvested in the business, or owners who simply want a better understanding of their financial situation.
If you’re an investor, you’ll probably calculate levered free cash flow because it reflects real-world financial obligations. Since debt payments can seriously affect a business’s ability to generate cash, analyzing this type of cash flow can help you better understand different investment opportunities.
Levered Free Cash Flow Formula
The levered free cash flow formula is:
Net Income + Non-cash Expenses − Changes in Working Capital − Capital Expenditures − Debt Principal Payments = Levered Free Cash Flow
For example, let’s say a company has $500,000 in operating cash flow and:
- $100,000 in capital expenditures
- $75,000 in debt payments
The calculation would be:
$500,000 – $100,000 -$75,000 = $325,000
In this scenario, the business generated $500,000 in operating income. After spending $100,000 on equipment and making $75,000 in debt payments, it had $325,000 available for shareholders or future investments.
What Is Unlevered Free Cash Flow?
Unlevered cash flow focuses solely on the cash a business generates and doesn’t look at financing decisions, including debt. This KPI tells you how much cash a company produces regardless of how it’s funded.
This distinction is important because two businesses can generate similar revenue and operating profits while carrying very different amounts of debt. Looking at unlevered free cash flow allows investors to compare those businesses on a more equal basis.
But when you’re calculating unlevered free cash flow, it’s still important to look beyond revenue. Strong sales alone don’t translate into a lot of cash. Understanding this relationship between cash flow vs. revenue will show you why some high-growth companies still struggle with liquidity. Further, comparing EBITDA and cash flow will give you more context, since EBITDA excludes some expenses that reflect how much cash a business has.
Unlevered Free Cash Flow Formula
When you’re learning how to calculate your free cash flow, this unlevered free cash flow formula is the simplest to follow:
EBIT × (1 − Tax Rate) + Depreciation and Amortization − Capital Expenditures − Changes in Working Capital = Unlevered Free Cash Flow
So, if a company has:
- EBIT: $600,000
- Tax Rate at 25%: $150,000
- Net operating profit after taxes: $450,000
- Depreciation and amortization: $50,000
- Capital expenditures: $100,000
- Increase in working capital: $25,000
The calculation would be:
$600,000 x (1 – 0.25) + $50,000 – $100,000 – $25,000
The company generated $375,000 in cash before considering any interest payments or debt obligations.
Differences Between Unlevered vs. Levered Free Cash Flow
| Levered FCF | Unlevered FCF |
| Includes debt payments | Excludes debt payments |
| Shows leftover cash available to shareholders | Shows the cash the business generates |
| Reflects the company’s capital structure and debt burden | Reflects operating performance independent of financing |
| Measures potential cash for distributions or reinvestment | Measures a business’s ability to generate cash |
Understanding levered vs. unlevered free cash flow comes down to one big difference: debt. Unlevered free cash flow focuses on operating performance and doesn’t look at debt, while levered free cash flow does consider the impact of debt on cash.
This difference makes each metric useful for a different purpose. Unlevered free cash flow is better for business valuations, financial modeling, and comparing companies with different capital structures. Levered free cash flow is more useful when evaluating shareholder value, dividend capacity, and the real-world impact of debt on available cash.
Before calculating either metric, it’s helpful to understand how businesses measure and improve free cash flow conversion, since strong conversion rates often indicate that reported earnings are being converted into usable cash.
Benefits of Analyzing Levered and Unlevered Free Cash Flow
Both metrics are important and can help you understand not only how much cash a company generates, but how financing decisions affect that cash.
There are other benefits of analyzing these KPIs, including:
- More accurate performance evaluation: You’ll get a clearer understanding of operating performance by analyzing both levered and unlevered free cash flow. That’s especially helpful for measuring true business success, whether you’re an investor or an owner.
- Improved valuations: Buyers and investors will always look at levered and unlevered free cash flow during the appraisal process. If you’re preparing for a sale, understanding these metrics will help you better navigate the process of selling your business and communicating its value to buyers.
- Smarter financial decisions: Does more debt make sense for your business? Calculate both types of cash flow to decide if options like an equity injection are worth it or if you need to try something else.
In-Summary
Ultimately, knowing when to use levered vs. unlevered free cash flow allows you to make better financial decisions. Investors get a more complete view of a company’s value, business owners can better evaluate financing options, and lenders can assess financial stability with greater confidence.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
