What is Levered Free Cash Flow?
The amount of money left over after a firm has met all of its recurrent financial commitments are referred to as Levered Free Cash Flow. These responsibilities encompass both short-term and long-term requirements, such as:
- Payments of interest
- Expenses of operations
- Taxes
- expenditures on capital (CAPEX)
- Payments on debts
Understanding Levered Free Cash Flow
Levered free cash flow (LFCF) is the earnings left in an income statement after all of its significant and long financial liabilities have been met. Interest rates and operational costs are examples of such expenses. Because "levered" is essentially another word for "loan," "levered" investment returns are those that are free of interest charges. Levered free cash flow is a valuable method to assess the financial position of business investors and increase its sales in relative terms, and it can also be a great predictor of whether or not a business will operate to raise extra capital from its finances.
Levered Free Cash Flow Formula
Even though you will also need to know a few significant information ahead, calculating leveraged free cash flow is pretty simple. This is how you can calculate levered free cash flow-
LFCF = EBITDA – Mandatory Debt Payments – Change in Net Working Capital – Capital Expenditures
Here's a more detailed explanation of what these phrases mean:
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) – Operating profits, taxation, degradation, and accruals. In short, it's a method of determining a firm's total financial status.
Mandatory Debt Payments – This is the total amount owed to debtors by a corporation.
Working Capital – The overall level of working capital accessible to a business is referred to as this.
Capital Expenditures – A firm's spending in fixed assets, such as property, facilities, or machinery, is known as capital expenditures.
Practical Example
The company, M&M is in the construction business. The owners invested $200,000 of their capital and took another loan of $300,000 when they established their business two years ago. They end up owing an average of $15,000 on the loan each month. Their EBITDA during the first year was $250,000.
In their second year, that sum had risen to $350,000. The first year's working capital was $90,000, while the second year was $150,000. They bought all of their equipment for $375,000 in the first year, and they didn't have any capital spending in the next year.
LFCF = EBITDA - change in net working capital - CAPEX - mandatory debt payments
Let's start with the first year's calculation:
LCFC = 250,000 - (15,000 X 12) - 90,000 - 375,000
= - $395,000
And the second year:
LCFC = 350,000 - (15,000 X 12) - (150,000-90,000) - 0
= $110,000
First year cash flow had a negative value but it leveled up in the second year start genrating better revenue.
In Sentences
- Levered free cash flow (LFCF) is commonly used in businesses to indicate the remaining income after paying all its debts and financial obligations.
- Even though operating income is favorable, a corporation might have a negative levered free cash flow.