I’m working through some problems related to value investing, and am wondering if perhaps I’m missing the point altogether. I’m trying to determine what if any difference there is between FCF’s and unlevered cash flows? To get an unlevered cash flow I presume I just take EBIT, and then subtract depreciation, change in WC, and capex spending. Then to make it after tax I subtract (EBIT*Tax Rate). I’m just not seeing how this has taken into account leverage at all? Is FCF not the same thing?
Unlevered cash flow means it’s not affected by a firm’s financing decisions, e.g. as if the firm is 100% equity.
art is correct… what does this have to do with “value investing”? you mean investment valuation?
I think I had a little bit of a brain cramp when asking this question - I see what you mean. By using EBIT it’s essentially a cash flow devoid of capital structure. Are the terms unlevered cash flow and FCF interchangeable? I’m just going through some possible DCF calculations, and was always previously using FCF for that model.
Liquid, are you an undergrad or new to the industry? No offense, just wondering. Free cash flow can have many definitions and representations: free cash flow, free cash flow to the firm, unlevered free cash flow, levered free cash flow, free cash flow to equity, FCF, UFCF, FCFE, LFCF, cash flow before debt servicing, cash flow after debt servicing, cash available for distribution, etc. etc. etc. The way the valuation world treats cash flow can sometimes be different than how a deal team would, which could be different to other analysts. Forgetting about all of that, the idea of free cash flow in a general sense is simple and very important: how much cash-- literally liquid cash-- does a company generate over a period. Because any asset can be valued by considering the present value of future cash flows, the importance is obvious. Now, the company’s assets as a whole generate cash flows for the company, so unlevered free cash flow (i.e. without considering leverage) is the cash flow that the assets generate for the company as a whole. If a company’s D/E is 150% or 25%, it doesn’t matter. Levered free cash flow is the cash flow available to equity holders after servicing debt (principal and interest).