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Unlevered free cash flow measures operating cash available before financing effects. Reconcile operating profit, operating taxes, noncash charges, working capital and capital spending, then check the result against operating cash flow.
Unlevered free cash flow measures cash generated by operations after operating taxes and reinvestment, before financing effects. Also called free cash flow to the firm, or FCFF, it gives finance teams a common operating measure when debt balances and interest costs differ. The calculation starts with operating profit and proves the result through working-capital and capital-spending schedules.
Unlevered free cash flow = EBIT × (1 − operating tax rate) + Noncash operating charges − Increase in operating working capital − Cash capital expenditures
NOPAT = EBIT × (1 − operating tax rate)
EBIT is earnings before interest and taxes. NOPAT is net operating profit after tax: the operating profit left after taxes calculated without the interest deduction. The CFA Institute's free cash flow valuation reading gives this EBIT-based FCFF formula and the alternative reconciliation from operating cash flow.
This differs from the common free cash flow definition, operating cash flow less capital expenditures. The SEC says that measure has no uniform definition and should be accompanied by a clear calculation and reconciliation in its non-GAAP financial measures guidance, Question 102.07. Put the word unlevered and the formula beside the result so readers know which cash flow they have.
Use the same reporting period, business scope and currency throughout. A consolidated income statement cannot be reconciled with working capital from only one subsidiary.
| Schedule | Rows needed | Treatment |
|---|---|---|
| Income statement | Operating profit before interest and tax | Starting EBIT |
| Operating tax schedule | Taxes attributable to operations before interest deductions | Subtract operating tax |
| Noncash operating schedule | Depreciation and amortization already deducted in EBIT | Add back once |
| Comparative balance sheet | Operating receivables, inventory, prepayments, payables and accruals | Calculate operating working-capital movement |
| Cash capital-spending schedule | Cash paid for operating fixed assets | Subtract cash capex |
Keep cash, debt and financing balances out of operating working capital. Tax balances also need separate handling when the tax schedule already includes their cash timing. Review unusual noncash items individually; an automatic add-back of every adjustment can conceal a cash obligation elsewhere in the bridge.
For a historical reconciliation, explain deferred taxes and timing differences between tax expense and cash taxes. For a normalized planning calculation, document the operating tax assumption. The example below assumes tax expense equals cash tax and has no deferred-tax movements, nonoperating items or acquisitions.
Consider a US industrial supplier for the year ended December 31, 2025. All amounts are USD. Its operating balances are:
| Operating balance | Opening (USD) | Closing (USD) | Change (USD) | Effect on working-capital investment (USD) |
|---|---|---|---|---|
| Trade receivables | 1,100,000 | 1,350,000 | 250,000 | 250,000 |
| Inventory | 800,000 | 950,000 | 150,000 | 150,000 |
| Operating prepayments | 100,000 | 120,000 | 20,000 | 20,000 |
| Trade payables | 700,000 | 880,000 | 180,000 | -180,000 |
| Operating accrued liabilities | 200,000 | 260,000 | 60,000 | -60,000 |
| Operating working capital | 1,100,000 | 1,280,000 | 180,000 | 180,000 |
Operating working capital equals receivables plus inventory plus prepayments, less payables and accruals. The opening calculation is 1,100,000 + 800,000 + 100,000 − 700,000 − 200,000 = $1,100,000. The same calculation on closing balances gives $1,280,000.
The increase is $180,000, so it consumes cash. The signed movements also sum to $180,000, providing a second check on the balance comparison. An increase in payables reduces the investment because suppliers are financing more of the operating assets.
The supplier's operating schedule contains EBIT of $2,400,000, depreciation of $300,000, amortization of $100,000 and cash capex of $650,000. Assume an illustrative operating tax rate of 25%, rather than a claim about the company's statutory tax position.
| Step | Calculation | Result (USD) |
|---|---|---|
| EBIT | Income statement operating profit | 2,400,000 |
| Operating taxes | 2,400,000 × 25% | -600,000 |
| NOPAT | 2,400,000 − 600,000 | 1,800,000 |
| Add depreciation | Noncash operating charge | 300,000 |
| Add amortization | Noncash operating charge | 100,000 |
| Subtract working-capital investment | From the balance schedule above | -180,000 |
| Subtract cash capex | Capital-spending cash schedule | -650,000 |
| Unlevered free cash flow | 1,800,000 + 300,000 + 100,000 − 180,000 − 650,000 | 1,370,000 |
The proof reverses the deductions: 1,370,000 + 180,000 + 650,000 = $2,200,000. NOPAT plus depreciation and amortization also equals 1,800,000 + 300,000 + 100,000 = $2,200,000. The bridge balances without a residual adjustment.
Suppose the same company has interest expense and cash interest of $240,000. With the same tax assumption, the after-tax interest cost is 240,000 × (1 − 25%) = $180,000.
| Reconciliation step | Calculation | Result (USD) |
|---|---|---|
| Pretax income | 2,400,000 − 240,000 | 2,160,000 |
| Cash tax | 2,160,000 × 25% | 540,000 |
| Net income | 2,160,000 − 540,000 | 1,620,000 |
| Operating cash flow | 1,620,000 + 300,000 + 100,000 − 180,000 | 1,840,000 |
| Add after-tax interest | 240,000 × 75% | 180,000 |
| Subtract capex | Cash spending | -650,000 |
| Unlevered free cash flow | 1,840,000 + 180,000 − 650,000 | 1,370,000 |
Both routes reach $1,370,000. Operating cash flow less capex alone is 1,840,000 − 650,000 = $1,190,000; the $180,000 difference is the after-tax financing cost removed for the unlevered calculation. This reconciliation assumes the interest and tax treatments shown; investigate classification and timing differences before applying it to a more complex statement.
For the broader allocation between capital providers, use levered versus unlevered free cash flow. If your starting report contains EBITDA, the EBITDA-to-FCF bridge explains that separate starting point.
Bring your operating income statement, comparative working-capital balances, tax assumptions and cash capital-spending schedule in a file or Google Sheet. Covirage maps the columns, and its tools compute and check the unlevered cash-flow bridge; the external AI model explains the result with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for finance teams for the supporting business context.
Yes, in the standard corporate-finance calculation, unlevered free cash flow and free cash flow to the firm describe the same cash flow before financing effects. State the formula because businesses may use different adjustments when they report other measures called free cash flow.
Depreciation reduces operating profit without being a current-period cash payment. Add it back when starting from EBIT, then subtract actual cash capital expenditures separately. This keeps the historical allocation of asset cost separate from the cash spent on assets during the period.
Debt repayments are financing movements and do not reduce unlevered free cash flow. Keep them in the debt schedule. The calculation measures cash before allocating it between lenders and shareholders, so new borrowing and principal repayments belong outside its operating bridge.
Yes. Capital spending or an increase in operating working capital can exceed after-tax operating profit plus noncash charges. Identify whether the shortfall comes from planned investment, collection timing or weak operating performance before interpreting the negative result.