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Levered vs. Unlevered Free Cash Flow: What’s the Difference?

There are two types of free cash flow: levered and unlevered. Levered free cash flow is the cash flow available to equity holders after all debts and other financial obligations have been paid. Unlevered free cash flow is the cash flow available to the company as a whole, including both equity holders and debt holders.


So which one is more important? It depends on your perspective. In this guide, we'll go over the main differences of the two to get a better understanding of what you need.


What Is Free Cash Flow?


Free cash flow (FCF) is the cash flow available to equity holders after all debts and other financial obligations have been paid. It's a measure of a company's financial health and is often used to assess whether or not a company can sustain its current operations or make future investments.


In other words, FCF is the cash that a company has on hand after paying off its expenses. This cash can be used for a variety of purposes, including reinvesting back into the business, issuing dividends, or repaying debt.


What Is Unlevered Free Cash Flow?


Unlevered cash flow is the same as free cash flow, except that it does not take into account the interest payments on debt. This metric is useful for comparing companies with different levels of debt, as it allows for a more apples-to-apples comparison.


Unlevered free cash flow is usually only visible to financial managers and investors, rather than to the average consumer. It showcases enterprise value to debtholders with a stake in the company's financial wellbeing.


This metric may also be called free cash flow to firm (FCFF). Regardless of how it is named, the most important thing to remember is that it's indicative of gross (rather than net) free cash flow.


What Is Levered Free Cash Flow?


Levered free cash flow is a measure of a company's cash flow that includes the interest payments on its debt. This metric is useful for comparing companies with different levels of debt, as it allows for a more apples-to-apples comparison.


Levered free cash flow is usually only visible to financial managers and investors rather than to the average consumer. It showcases enterprise value to debtholders with a stake in the company's financial wellbeing.


A company's free cash flow is the amount of money it has available after expenses to build equity or make investments.


Comparing Unlevered vs. Levered Free Cash Flow


The financial health of an organisation can be measured in many ways, but one holistic way is to look at the organisation's cash flow. This measures how much cash is coming in and going out of the organisation and can give a good indication of the organisation's financial health.


There is a regular income that comes in each month, and then there are the expenses that happen each month. The goal is to have the regular income be greater than the expenses so that there is money left over each month.


Conclusion


In conclusion, both levered and unlevered free cash flow are important measures of a company's financial health. Both measures are useful in different ways and should be considered when making financial decisions about a company.


If you want to learn more about assessing your finances, The ECommerce Accountant can help. We are an accountant in Australia that you can consult for financial matters. Get in touch with us today to learn more.

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