Unlevered free cash flow (UFCF) estimates cash generated by operations that is available to all capital providers before interest and debt repayments. Analysts commonly forecast UFCF in a discounted cash flow model and discount it at the weighted average cost of capital to estimate enterprise value.
Unlevered free cash flow formula
A common formulation is:
UFCF = EBIT × (1 − tax rate) + D&A − capital expenditures − increase in net working capital.
EBIT is earnings before interest and taxes. D&A is depreciation and amortization. Capital expenditures are cash investments in long-lived operating assets. Net working capital for this purpose normally includes operating current assets less operating current liabilities, excluding cash and debt-like items. Definitions must remain consistent across historical and forecast periods.
Worked example
| Input | Amount |
|---|---|
| EBIT | $1,000,000 |
| Tax rate | 25% |
| D&A | $120,000 |
| Capital expenditures | $180,000 |
| Increase in net working capital | $70,000 |
After-tax operating profit is $750,000. Adding $120,000 of D&A, subtracting $180,000 of capital spending and subtracting the $70,000 working-capital increase produces $620,000 of UFCF. This simplified example ignores other adjustments and is not a valuation.
Why each adjustment matters
- Taxes: Apply an appropriate tax assumption to operating profit without deducting interest.
- D&A: Add back the noncash expense, while recognizing that assets still require reinvestment.
- Capital expenditures: Subtract cash spent to maintain and grow operating capacity.
- Working capital: An increase generally consumes cash; a decrease generally releases it.
Do not automatically treat every current balance as operating. Classify leases, customer financing, taxes and other items according to the model’s documented convention.
From UFCF to enterprise and equity value
Forecast UFCF, discount each period at WACC and add the discounted terminal value. The result is enterprise value under the model. To bridge to equity value, adjust for net debt and other debt-like or nonoperating items, then account for diluted shares where relevant.
Small changes in WACC, terminal growth and margin can dominate the result. Show sensitivity tables and explain the operating assumptions. A disciplined financial research process helps keep inputs traceable.
Common modeling errors
- Subtracting interest even though UFCF is pre-financing.
- Mixing cash taxes, book taxes and a statutory rate without explanation.
- Adding back D&A but omitting realistic capital needs.
- Using total current assets minus liabilities without removing financing items.
- Combining nominal cash flows with a real discount rate, or vice versa.
- Comparing companies whose UFCF definitions differ.
Frequently asked questions
Is UFCF the same as cash from operations?
No. Cash from operations follows financial-statement classifications. UFCF is an analytical measure that adjusts operating profit for taxes, noncash charges, reinvestment and working capital.
Why is interest excluded?
UFCF values operations before financing choices. Financing cost is reflected through WACC and the later bridge from enterprise to equity value.
Can UFCF be negative?
Yes. Early growth, weak operations, heavy reinvestment or working-capital expansion can produce negative UFCF. The cause and funding implications matter more than the sign alone.
Sources reviewed
Last reviewed: August 15, 2026.