Unlevered Free Cash Flow (UFCF): Formula and Worked Example

The formula and its components

NOPAT is operating profit after tax. D&A is added back because it is a noncash operating expense. CapEx is deducted when cash is invested in long-lived assets. An increase in noncash operating net working capital is a use of cash.

UFCF = NOPAT + D&A − CapEx − Δ operating NWC
NOPAT = EBIT × (1 − tax rate)

Worked example: $7m EBITDA to $3.5m cash flow

With $7m EBITDA and $1m D&A, EBIT is $6m. At 25% operating tax, NOPAT is $4.5m. Add back $1m D&A, subtract $1.5m CapEx and subtract $0.5m working-capital investment: UFCF is $3.5m.

The alternative EBITDA bridge is $7m − $1.5m operating taxes − $1.5m CapEx − $0.5m working capital = $3.5m. The same assumptions should produce the same result.

Working capital signs

For a simplified operating definition, NWC is receivables plus inventory minus operating payables. Exclude cash and debt from this operating measure. If NWC falls from $4m to $3m, ΔNWC is −$1m and subtracting that change adds $1m to cash flow. Distinguish a sustainable release from a one-time collection or supplier stretch.

Taxes and financing do not belong in the same bridge

Use tax on operating profit for UFCF. Do not subtract debt interest or loan principal and still call the result unlevered. To derive company cash after financing, apply cash interest, its actual tax benefit, repayments and distributions separately. Losses, carryforwards and deduction limits can make a normalized tax formula differ from cash taxes.

Use UFCF in valuation

Discount UFCF at WACC for a firm DCF, or at the unlevered cost of capital for APV’s operating component. Forecast maintenance and growth investment consistently with terminal growth. In diophos, inspect the FCF bridge before interpreting debt capacity or cash accumulation; earnings growth alone does not guarantee cash growth.