Definition
Levered Free Cash Flow (LFCF) is a financial metric that indicates how much cash a company has left after paying its financial obligations, including interest and principal on debt, capital expenditures, and taxes. It provides a measure of a company’s ability to generate cash for its shareholders after meeting all its financial obligations. LFCF is often used by investors and analysts to assess a company’s financial health and its ability to pay dividends or buy back shares.
Key Takeaways
- Levered Free Cash Flow (LFCF) is a financial performance measure that shows the amount of cash a company has left after covering all operational costs and financial obligations, including interest and principal payments on debts. It reflects the true amount of cash that a company can distribute among its stakeholders and reinvest for business growth.
- LFCF is important for investors because it indicates a company’s ability to generate cash while managing and repaying its debt. This makes it a valuable assessment tool for the financial stability, operational efficiency, and growth prospects of a business. Companies with a high LFCF are considered attractive investment opportunities.
- However, consistently low or negative LFCFs may indicate that a company is struggling to generate sufficient cash and manage its debt effectively. This might pose a risk for potential investors. In such scenarios, analyzing the factors contributing to low LFCF is crucial to understand the company’s financial health and future prospects.
Importance
Levered Free Cash Flow (LFCF) is an important finance term as it represents the amount of cash available to investors, after a company has paid its operating expenses, taxes, and financial obligations.
It’s a critical metric for investors, creditors, and market analysts to evaluate a company’s financial health, profitability, and value, particularly in comparison to its peers.
The LFCF shows if the company is capable of servicing its debt and dividends with its operational cash revenues, which is crucial in assessing the risk of lending money to or investing equity in the firm.
Additionally, consistent positive values of LFCF over time generally indicate sound business operations and growth potential.
Explanation
Levered Free Cash Flow (LFCF) is one key indicator of a company’s financial health and its ability to generate cash after mandatory obligations have been met. This performance measurement plays a crucial role in assessing the viability and sustainability of a company from an investor or creditor’s perspective.
From a practical point of view, it’s a vital metric to determine whether a company can repay its debts, maintain ongoing operations, and make new investments without needing to secure additional financing or capital. Furthermore, Leveraged Free Cash Flow can aid investors anticipating buyouts or acquisitions.
High LFCF values might make a company a more attractive investment or acquisition target, as they indicate that the firm has sufficient cash flows to satisfy its debt obligations. This enables a potential acquirer to finance the purchase with the target company’s own cash flows.
Moreover, LFCF is essential in the valuation of the firm as it forms the basis for models like the Discounted Cash Flow (DCF) analysis, which helps investors determine the value of an investment based on its future cash flows.
Examples of Levered Free Cash Flow
McDonald’s Corp: As of 2018, the levered free cash flow for McDonald’s Corporation was reported to be
5 billion USD. This is the amount of money that was available to the company after paying its financial obligations, which could be used for activities like reinvesting back into the business or paying dividends back to shareholders.
Apple Inc: In 2020, Apple had a levered free cash flow of over $80 billion. This significant amount illustrates the high profitability and efficiency of Apple’s operations. The robust levered free cash flow has enabled the company to undertake massive stock buybacks, pay out dividends, as well as invest in product development and expansion activities.
Amazon Inc: In 2019, Amazon had a levered free cash flow of $
1 billion. This significant cash flow allowed Amazon to invest in various growth initiatives, such as the development of its AWS cloud infrastructure, expansion of its logistic capabilities and investment in original content for its streaming video platform, Amazon Prime Video. The cash flow also supports the company’s potential future acquisition strategies and continuous investment in improving customer service and experience.
Levered Free Cash Flow FAQ
What is Levered Free Cash Flow?
Levered Free Cash Flow (LFCF) is the amount of cash a business has after it has met all its financial obligations. It is what a business uses to grow its operations, invest in new projects, or return money to shareholders.
How is Levered Free Cash Flow calculated?
Levered Free Cash Flow can be calculated by taking the company’s unlevered free cash flow and subtracting the yearly interest paid on outstanding debts.
Why is Levered Free Cash Flow important?
Levered Free Cash Flow is important because it gives investors a clearer picture of a company’s financial health and potential profitability. It shows how much cash a company has available to reinvest in its business or distribute to shareholders, after all debts have been paid.
What is the difference between Levered and Unlevered Free Cash Flow?
Unlevered Free Cash Flow is the cash flow that is available to all investors, including debt holders, while Levered Free Cash Flow is the cash available only to equity investors, after all debt payments have been accounted for.
Related Entrepreneurship Terms
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization
- Net Operating Profit After Tax (NOPAT): A company’s potential cash earnings if there were no interest expense or tax advantages due to debt.
- Debt service: The cash that is required over a period to cover the repayment of interest and principal on a debt.
- Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment.
- Adjusted EBITDA: It’s the EBITDA after adjustments have been made for discretionary and non-cash items, providing a representation of cash flow more compatible with levered free cash flow calculation.
Sources for More Information
- Investopedia: It offers a wide range of resources guiding you to understand financial concepts, including Levered Free Cash Flow.
- Corporate Finance Institute (CFI): It provides professional courses, articles, and free resources related to finance and analytics, including Levered Free Cash Flow.
- Wall Street Mojo: This site offers comprehensive articles on different areas of finance, including Levered Free Cash Flow.
- Seeking Alpha: This is a stock market analysis website that provides tools and insights for investors, including information on Levered Free Cash Flow.
