Levered Free Cash Flow (LFCF) Calculator
From UFCF, after-tax interest and net borrowing, compute the cash flow truly available to equity holders.
Input Data
Results
At a glance:Levered Free Cash Flow (LFCF) is the cash distributable to equity holders after interest and debt cash flows: LFCF = UFCF − interest × (1 − tax) + net borrowing. Unlike UFCF (no debt, for all capital providers), LFCF subtracts after-tax interest to creditors and adds net borrowing (new minus repaid) — new debt brings cash, repayment uses it. LFCF reflects the cash equity actually gets under the financing policy, key for dividends and equity valuation (discount at cost of equity).
Formula
LFCF = UFCF − interest × (1 − tax rate) + net borrowing.
$$\text{LFCF} = \text{UFCF} - \text{Interest} \times (1 - t) + \text{Net Borrowing}$$How to Use
- Enter the unlevered free cash flow (UFCF) computed earlier.
- Enter interest expense and the applicable tax rate.
- Enter net borrowing (negative if net repayment) to view LFCF.
UFCF 635,000, interest 100,000, tax 16.5% (after-tax 83,500) — LFCF by net borrowing
| Net borrowing | Meaning | LFCF |
|---|---|---|
| −100,000 | Net repayment (uses cash) | 451,500 |
| −50,000 | Small net repayment | 501,500 |
| 0 | Borrowing = repayment | 551,500 |
| +100,000 | Net new debt | 651,500 |
| +200,000 | Large new debt | 751,500 |
Case Studies
Case 1: Net repayment vs net borrowing — shareholder cash
A firm: UFCF HK$635,000, interest HK$100,000, tax 16.5%, after-tax interest = 100,000 × (1 − 0.165) = HK$83,500.
Deleveraging year — net borrowing −80,000: LFCF = 635,000 − 83,500 − 80,000 = HK$471,500.
Expansion year — new debt +120,000: LFCF = 635,000 − 83,500 + 120,000 = HK$671,500.
Same operating cash (UFCF), only financing flipped from repay to borrow, and shareholder cash jumps from 471,500 to 671,500. So high LFCF need not mean a stronger core business — it may just be more borrowing that year; judge with the debt trend.
Case 2: Heavy interest eating shareholder cash flow
A highly leveraged firm: UFCF HK$800,000, interest HK$300,000, tax 16.5%, after-tax interest = 300,000 × (1 − 0.165) = HK$250,500; net borrowing −50,000.
LFCF = 800,000 − 250,500 − 50,000 = HK$499,500.
Core UFCF is 800k, but heavy interest eats 250k+ and repayment leaves under 500k for shareholders. Leverage cuts both ways: amplifies returns but interest and principal erode shareholder cash; if core cash weakens or rates rise, LFCF can deteriorate fast or turn negative. For dividends and equity valuation, LFCF is closer to what shareholders can actually take than UFCF.
FAQ
Why deduct after-tax interest?
LFCF belongs to shareholders; interest goes to creditors, so it is deducted from unlevered cash. Because interest is tax-deductible (tax shield), the actual cash taken from shareholders is the after-tax interest — interest × (1 − tax). This is the key LFCF vs UFCF difference.
Why add back net borrowing?
New borrowing brings cash shareholders can use (add); principal repayment uses cash (subtract). So net borrowing (new − repaid) adjusts — positive adds to LFCF, negative (net repayment) reduces it, reflecting financing's effect on shareholder cash.
What does negative LFCF mean?
Negative LFCF means after interest and net repayment the firm has no surplus cash for shareholders that period — from large capex, concentrated debt paydown or weak operating cash. Occasional negatives (expansion, deleveraging) are normal; but persistently negative and propped by new equity issuance warrants caution on returns and sustainability.
What discount rate for LFCF valuation vs UFCF?
The discount rate must match the cash flow's owner — the key rule. LFCF (levered) is 'after tax-interest and net borrowing, truly for shareholders', so discount at the cost of equity to get equity value. UFCF (unlevered) is 'for all capital providers, pre-interest', so discount at WACC to get enterprise value, then subtract net debt for equity value. The two paths should converge. Analysts often prefer UFCF + WACC (LFCF is more volatile, harder to forecast net borrowing year by year; UFCF is cleaner and comparable across leverage). But for 'how much cash shareholders get / dividend capacity', or stable financing (mature REIT, utility), LFCF + cost of equity is apt. Never discount LFCF at WACC or UFCF at cost of equity — that mismatches.
Long-run negative LFCF propped by new equity — a warning?
Negative LFCF means the core business cannot fund shareholders after interest and repayment, and the firm must 'ask shareholders for money'. Occasional negatives are fine (expansion capex, deleveraging) and expected to turn positive. But persistently negative LFCF covered by repeated new share issues or new debt signals: (1) dilution — each issuance dilutes holders' stake and EPS; (2) sustainability doubt — if it cannot self-fund when financing tightens (rate hikes, credit squeeze), the chain may break; (3) poor return quality — if raised funds' ROIC < cost, it destroys value while diluting. So ask: where did the money go (growth or covering losses)? When will it turn positive? How is the gap filled? That decides 'cost of growth' vs 'operating alarm'. Educational use only.
Related Tools
References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.