Levered vs. Unlevered Free Cash Flow: Formulas, Differences, and Use Cases

Free cash flow is the cash a business has left after paying for its operating costs and investments. The total changes depending on whether debt payments are counted.

Unlevered free cash flow measures cash before interest and debt payments. It shows how much cash the core business generates, regardless of how the company is financed.

Levered free cash flow is the cash left after paying interest and debt. This amount shows how much is available for:

• Dividends
• Acquisitions
• Additional CAPEX
• Debt reduction
• Other business needs

For example, a manufacturing group could have €12 million in unlevered free cash flow. After paying interest and debt, its levered free cash flow might fall to €5 million. The business earns solid cash, but debt limits what management can use for other needs.

Read more: Strategic Financial Planning That Actually Drives Results

This difference matters because each metric supports different decisions. Unlevered free cash flow helps analyze operations, compare companies, and value a business. Levered free cash flow is useful for planning liquidity, refinancing, and dividends.

This article explains how to calculate both metrics, when to use each, and how to include them in one financial model.

Unlevered free cash flow shows the cash a business generates before paying interest or debt. Simply put, it measures how much cash the main business brings in before financing decisions come into play.

Since it leaves out debt costs, this metric helps teams compare companies with different ways of financing. It is also useful for reviewing operations, analyzing investments, and valuing a business.

Use this formula:

Each part has a clear role:

• EBIT shows operating profit before interest and tax.
• Tax rate adjusts operating profit for tax.
• Depreciation and amortization add back non-cash expenses.
• CAPEX reflects cash spent on long-term assets.
• Change in net working capital shows how inventory, receivables, and payables affect cash.

So, this formula brings together operating profit, investment, and working capital into a single measure.

Consider a manufacturing company with these annual results:

First, calculate operating profit after tax:

€14 million × (1 − 25%) = €10.5 million

Next, add depreciation and amortization. Then subtract CAPEX and the increase in net working capital:

€10.5 million + €5 million − €7 million − €2 million = €6.5 million

The company ends up with €6.5 million in unlevered free cash flow.

This result shows the cash the business makes before financing costs. But it does not show how much is left after paying interest and debt.

Levered free cash flow shows the cash left after a company pays interest and required debt. This gives a clearer picture of how much cash is available to shareholders.

Teams use it to assess:

• Liquidity
• Dividend capacity
• Debt pressure
• Refinancing needs
• Funding for new investment

You can calculate levered free cash flow from net income:

You can also start with unlevered free cash flow:

The second formula clearly links the cash generated by operations to the cash left after financing.

Now use the same manufacturing company. It generated €6.5 million in unlevered free cash flow.

Add these financing assumptions:

First, calculate after-tax interest:

€2 million × (1 − 25%) = €1.5 million

Then calculate levered free cash flow:

€6.5 million − €1.5 million − €3 million + €1 million = €3 million

The company ends up with €3 million in levered free cash flow.

Operations brought in €6.5 million before financing, but only €3 million was left after interest, repayments, and new borrowing. This gap shows how debt affects how much the company can spend.

The main difference is how each metric handles financing.

Unlevered free cash flow leaves out the impact of debt, so it helps teams compare businesses fairly.

Levered free cash flow includes financing costs. This means it shows how borrowing, interest rates, and repayment terms affect the cash available.

For example, two manufacturers might have the same EBIT and similar CAPEX. But the one with more debt will usually have lower levered free cash flow. Unlevered free cash flow shows if their main operations perform at the same level.

The metrics also lead to different valuation results:

• Discount unlevered free cash flow with WACC to calculate enterprise value.
• Discount levered free cash flow with the cost of equity to calculate equity value.

Do not mix the cash flow type and discount rate. Otherwise, the model may overstate or understate value.

Read: Internal Rate of Return vs ROI: Which Metric Should Drive Your Investment Decisions?

Choose the metric that best answers your specific question.

Unlevered free cash flow is helpful when comparing companies, business units, or acquisition targets that have different amounts of debt.

It gives a clearer view of:

• Operating cash generation
• Working capital needs
• CAPEX requirements
• Cash conversion
• Core business performance

For example, a pharmaceutical distributor might show strong EBITDA. But if it has high inventory and slow customer payments, much of its cash could be tied up. Unlevered free cash flow makes this clearer than EBITDA alone.

Teams also use unlevered free cash flow to value an entire business.

The process follows five steps:

1. Forecast unlevered free cash flow.
2. Discount each period with WACC.
3. Calculate terminal value.
4. Add the present value of the forecast cash flows.
5. Subtract net debt to reach equity value.

This method separates how the business performs from how it is currently financed.

Levered free cash flow shows the cash remaining after financing costs. This helps answer practical questions like:

• Can the company meet scheduled repayments?
• Is there enough cash to fund dividends?
• Will higher interest rates create pressure?
• Does the business need to refinance?
• Can it fund new CAPEX from internal cash?

A manufacturer might have €8 million in unlevered free cash flow but only €3 million in levered free cash flow. The second number shows what is left after paying debts.

Both metrics are useful when teams test what happens in worse-case scenarios.

Consider an FMCG distributor where:

• Sales volume falls
• Inventory days increase
• Customers pay later
• Interest rates rise
• Debt repayments stay fixed

Unlevered free cash flow might stay positive, but levered free cash flow could drop close to zero.

The difference shows if cash pressure comes from operations, financing, or both. In Farseer, teams can put the base case, downside case, and financing case into one model.

They can then see how changes in sales, margins, inventory, payment terms, interest rates, and debt repayments affect both cash flow metrics. This is important because scenario planning works best when teams adjust several related assumptions together, not just update separate spreadsheets.

This approach matches Gartner’s advice for scenario planning: focus the model on the main business drivers, not on every line item separately.

Calculate both metrics using the same assumptions. This keeps the model consistent and makes it easier to review each scenario.

Start with operating drivers

First, build the forecast around the factors that shape cash:

• Sales volume and price
• Gross margin
• Operating costs
• Inventory
• Receivables
• Payables
• CAPEX
• Taxes

For example, a food manufacturer can connect inventory to production volume, seasonal demand, and supplier lead times. If one assumption changes, the model updates the related cash impact.

Next, calculate EBIT after tax. Then add depreciation and amortization, subtract CAPEX, and account for the change in net working capital.

This shows the cash generated before any financing costs.

After that, include:

• Opening debt
• New borrowing
• Interest rates
• Interest expense
• Required repayments
• Closing debt

Keep these items together in one debt schedule. This way, the income statement, balance sheet, and cash flow forecast all use the same debt assumptions.

Use a simple bridge:

This bridge makes it clear how financing changes the cash available.

Finally, test changes such as:

• Lower sales
• Higher material costs
• Slower collections
• Higher inventory
• More CAPEX
• Higher interest rates
• Faster debt repayment

Since both metrics use the same model, teams can see the effects of operations and financing at the same time.

There are several common mistakes that can distort both metrics.

EBITDA excludes taxes, CAPEX, working capital, interest, and debt repayments.

A food producer might report higher EBITDA even as inventory grows and customers pay more slowly. In this case, cash could decrease even though EBITDA goes up.

Read: Operating Profit vs EBITDA: What Matters in Planning?

When revenue grows, inventory and receivables often increase before the company collects cash. KPMG also links working capital checks with cash flow forecasting and process changes to spot cash impacts.

Use operating drivers such as:

• Average collection period for receivables
• Inventory holding period
• Supplier payment terms

These drivers make the timing clearer than just using a fixed percentage of revenue.

Keep CAPEX and working capital in the operating model. Keep interest, borrowing, and debt repayments in the financing layer.

If not, the model might count the same cash movement twice or miss it completely.

Calculate tax on EBIT for unlevered free cash flow. Then use after-tax interest when you reconcile unlevered and levered free cash flow.

This keeps both calculations consistent.

Interest expense does not show the full cash cost of debt. A company might pay low interest but still have large scheduled repayments.

Therefore, the debt schedule must include both interest and principal.

Separate files often contain different assumptions. One may use the latest CAPEX plan, while another uses an old debt schedule.

Using one set of drivers reduces errors and makes it easier to explain cash flow.

A reliable forecast links operating plans, working capital, CAPEX, and debt together.

First, connect each cash flow line to a business driver. Sales volume should drive revenue, production should affect inventory, and debt terms should set interest and repayments.

Next, compare actual cash flow to the forecast every month. Focus on the main reasons for differences, like higher inventory, slower collections, delayed CAPEX, or higher interest costs.

Then, update the forecast whenever those drivers change. Don’t wait for the next annual planning cycle.

Finally, test scenarios that combine both operational and financing pressures. For example, model lower sales along with slower collections and higher interest rates. This approach gives a clearer view of cash risk than testing each assumption on its own.

The process slows down when sales plans, working capital, CAPEX, and debt are kept in separate spreadsheets. Farseer brings all these inputs into one planning model. This way, changes in operating assumptions automatically update both unlevered and levered free cash flow.

Deloitte notes that strong cash flow forecasting depends on the right model structure, process, and governance, not only on the calculation itself.

Unlevered free cash flow shows how much cash the core business generates before financing costs. Levered free cash flow shows what is left after paying interest and required debt.yments.

Use unlevered free cash flow for analyzing operations, comparing with peers, and valuing the business. Use levered free cash flow for planning liquidity, debt, and dividends.

Most importantly, calculate both metrics using the same drivers. Connect revenue, margins, working capital, CAPEX, tax, and debt in one model. Then test how changes in operations and financing affect cash.

Farseer supports this approach by linking all these assumptions in one planning environment, making forecasts quicker to update and easier to review.