Levered Free Cash Flow Calculator

1. What is the Levered Free Cash Flow Calculator?

Definition: This calculator computes the levered free cash flow ($ LFCF $), which represents the cash available to equity holders after accounting for operating cash flow, working capital changes, capital expenditures, and mandatory debt payments.

Purpose: Helps investors and businesses assess the cash flow available to shareholders after debt obligations, aiding in valuation and financial planning.

2. How Does the Calculator Work?

The calculator follows a single-step process to compute LFCF:

Formula:

$$ LFCF = E + \Delta N - C - M $$

Where:

$ LFCF $: Levered Free Cash Flow (dollars)
$ E $: EBITDA (dollars)
$ \Delta N $: Change in Net Working Capital (dollars)
$ C $: Capital Expenditures (dollars)
$ M $: Mandatory Debt Payment (dollars)

Steps:

Step 1: Determine $ E $. Input the EBITDA from the income or cash flow statement.
Step 2: Determine $ \Delta N $. Input the net change in working capital from the cash flow statement.
Step 3: Determine $ C $. Input the capital expenditures from the cash flow statement.
Step 4: Determine $ M $. Input the estimated mandatory debt payment (e.g., from the financing section of the cash flow statement).
Step 5: Calculate $ LFCF $. Add $ E $ and $ \Delta N $, then subtract $ C $ and $ M $.

Note: Mandatory debt payment is often approximated using total debt/borrowing payments reported in the cash flow statement, as companies may not specify obligatory portions.

3. Importance of Levered Free Cash Flow Calculation

Calculating LFCF is crucial for:

Equity Valuation: Provides cash available to equity holders after debt obligations, useful for dividend analysis.
Financial Health: Assesses the company’s ability to service debt while generating shareholder value.
Investment Decisions: Supports discounted cash flow (DCF) models for equity valuation.

4. Using the Calculator

Example 1 (Nvidia 2019): (Assuming $ \Delta N $, $ C $, and $ M $ are derived; using approximate values based on context) $ E = \$4,066,000,000 $, $ \Delta N = \$500,000,000 $, $ C = \$1,000,000,000 $, $ M = \$300,000,000 $:

Step 1: $ E = \$4,066,000,000 $.
Step 2: $ \Delta N = \$500,000,000 $.
Step 3: $ C = \$1,000,000,000 $.
Step 4: $ M = \$300,000,000 $.
Step 5: $ LFCF = 4,066,000,000 + 500,000,000 - 1,000,000,000 - 300,000,000 = \$3,266,000,000 $.
Result: $ LFCF = \$3,266,000,000 $.

An LFCF of $3,266,000,000 indicates significant cash available to equity holders after obligations.

Example 2: $ E = \$1,500,000,000 $, $ \Delta N = \$200,000,000 $, $ C = \$400,000,000 $, $ M = \$100,000,000 $:

Step 1: $ E = \$1,500,000,000 $.
Step 2: $ \Delta N = \$200,000,000 $.
Step 3: $ C = \$400,000,000 $.
Step 4: $ M = \$100,000,000 $.
Step 5: $ LFCF = 1,500,000,000 + 200,000,000 - 400,000,000 - 100,000,000 = \$1,200,000,000 $.
Result: $ LFCF = \$1,200,000,000 $.

An LFCF of $1,200,000,000 reflects a healthy cash flow for equity.

Example 3: $ E = \$800,000,000 $, $ \Delta N = \$-50,000,000 $, $ C = \$300,000,000 $, $ M = \$600,000,000 $:

Step 1: $ E = \$800,000,000 $.
Step 2: $ \Delta N = \$-50,000,000 $.
Step 3: $ C = \$300,000,000 $.
Step 4: $ M = \$600,000,000 $.
Step 5: $ LFCF = 800,000,000 + (-50,000,000) - 300,000,000 - 600,000,000 = \$-150,000,000 $.
Result: $ LFCF = \$-150,000,000 $.

A negative LFCF of -$150,000,000 indicates insufficient cash after debt payments.

5. Frequently Asked Questions (FAQ)

Q: What is levered free cash flow?
A: Levered free cash flow ($ LFCF $) is the cash available to equity holders after accounting for operating cash flow, working capital changes, capital expenditures, and debt obligations.

Q: Why is mandatory debt payment controversial?
A: Companies may not clearly distinguish mandatory versus discretionary debt payments, so it’s often estimated from total debt repayments in the cash flow statement.

Q: Can LFCF be negative?
A: Yes, if outflows (e.g., CapEx, debt payments) exceed inflows (e.g., EBITDA, ΔNWC), $ LFCF $ can be negative.