Unlevered Free Cash Flow (UFCF) measures the cash generated by the firm before any payments to debt or equity holders are considered.It measures the cash a firm makes from its core operations, excluding interest and tax consequences of debt financing. Therefore, the profits we use to calculate FCF are net operating profit after tax.Depreciation is not a cash expense that is paid by the firm. Rather, it's an accounting method to spread the cost of an asset over its lifespan. It's not included in cash flow forecasts - only the real cash spent on buying the asset is. To calculate the free cash flow, we need to add the depreciation expense back to the earnings (NOPAT) and deduct the real capital expenditure.Any increases in non-cash working capital represent an investment that reduces the cash available to the firm and so reduces free cash flow. We define the increase in non-cash working capital in year t as the following formula:
Learn Unlevered Free Cash Flow (UFCF) with interactive examples and practice exercises in our Valuation module.
This interactive learning module helps you understand Unlevered Free Cash Flow (UFCF) through hands-on practice and real-world examples.