CandleFocus

Unlevered Free Cash Flow (UFCF)

Candlefocus Editor
Unlevered free cash flow, also referred to as re-investment cash flow or unleveraged cash flow, is one of the most important indicators of a business's future growth potential. It is the amount of cash remaining after all necessary capital expenditures and operations have been paid, but prior to debt servicing or other financial obligations. In other words, it reflects the cash remaining for the company to utilize for growth and prepares for future investments without the burden of debt payments or other financial liabilities.

Investors rely on UFCF when conducting an analysis of a company's ability to fund operational growth and investments. This analysis can be accomplished through discounted cash flow (DCF) analysis which is based on the principle that money received in the future is worth less than the same amount of money received today. Utilizing UFCF allows the discount rate to be applied to the cash generated from operations, eliminating the requirement to consider debt servicing costs.

When considering a company for investment, it is important to look at the company's ability to generate sufficient cash flow to fund growth and maintain or create value. UFCF measures the true discretionary cash generated by the company and also allows investors to compare the actual cash generated to the stock price, creating a more accurate assessment of the company's value and potential growth.

The benefits of calculating and analyzing a company's UFCF are numerous. It allows not only investors to gain a better understanding of the potential value of the company but also allows management to assess where potential opportunities lie to increase profitability and cash flow. UFCF can be compared to the industry average to create a further assessment of the company's performance and potential.

Overall, unlevered free cash flow is one of the most important measurement tools for investors. It not only allows investors to gain a better understanding of a company's value but also allows management to identify operational openings that may be overlooked. UFCF should be analyzed and compared to both the industry and to other financial ratios to gain a more informed investment decision.

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