Unlevered Free Cash Flow - UFCF
Categories: Accounting, Company Valuation
Ignore the interest payments. Then just look at the free cash flow.
What a weird request, huh? Well, when you get rid of the "levered" part of a company (i.e. their capital structure, likely engineered by snappy, sharp bankers, and not by the people who actually operate the company), you see through the banking and just get a picture of the health of the business itself.
Some businesses are doing just fine operationally...they just have too much debt. Either by dint of their own fault, ignorance, greed, whatever...they convinced a bank to loan them money that shouldn't have been loaned. So maybe the debt needs to be rejiggered, so as to be paid off later or at lower or different rates. That's why you look at the unlevered free cash flow numbers verus free cash flow net of debt payments. If the business is still healthy, generating lots of free cash, then there's hope that the company can go on and on...
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Finance: What is free cash flow?13 Views
Finance allah shmoop what is free cash flow Well it's
the cash a company produces and pretty much after everything
like whatever dot com has one hundred million bucks in
pre tax profits A tax bill of thirty milton at
them seventy million dollars in earnings But they also had
depreciation on their whatever stamping factory of ten million dollars
So in fact they generated eighty million dollars in cash
while having seventy million in earnings And no there were
no tricky things done in the year to draw down
inventory volumes to produce a lot more cash or any
other chick a nunnery here The company also has committed
to paying a dividend of five milic order or twenty
mil a year That dividend payment gets included in the
free cash flow calculation as well So after eighty million
in cash production from operations the dividend the company pays
out to shareholders then is taken out of that eighty
So the free cash number Yep sixty million bucks And
why does this number even matter Well if you go
old school on investing and think about what a share
of a given company buys you in the form of
earnings and cash or dead on the balance sheet this
year Next year in the next you can think of
whatever dot com in terms of having a free cash
flow yield That is if the company was valued at
a billion dollars and it had one hundred million dollars
of cash and one hundred million dollars of dead zero
net cash or debt And yes this is oh so
theoretical Well then the company would have a six percent
free cash flow yield right because it's generating sixty million
after everything over a bill so that sixty mill is
the free cash flow But investors get the free cash
flow in some form most likely justin accumulation of cash
on the balance sheet and then they also get another
twenty mill in dividends So add to that twenty million
dividends and assuming you get no growth or decline while
investors or buying in it a billion dollar valuation while
they be getting a total of eight percent of their
cash back in one form or another each year either
in just cash produced by the company free castle and
or that dividend or set another way the sixty million
free cash flow would presumably then just accumulate on the
balance sheet Adding value to the company is cash piled
up or would be used wisely in one form or
another presumably like to buy back stock or by competitors
or whatever other whatever's The key idea here is that
free cash flow is truly free It's not encumbered It
is an ode for dividends or other big sinking fund
obligations This year or other things it's free and available
for the company to do You know whatever they want 00:02:26.105 --> [endTime] with