What's the difference between unlevered and levered free cash flow?

Unlevered free cash flow, also called free cash flow to the firm, ignores how the company is financed: NOPAT plus D&A, less capex and the build in working capital. Levered free cash flow subtracts after-tax interest and mandatory principal, so it belongs to shareholders alone.

Updated October 20, 2026

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The numbers, step by step

EBIT $200, D&A $40, capex $50, working capital up $15, interest $40, required principal $25 and a 25% tax rate.

Taxed EBIT$200 × (1 − 25%)

$150

Unlevered free cash flow$150 + $40 − $50 − $15

$125

After-tax interest$40 × (1 − 25%)

$30

Levered free cash flow$125 − $30 − $25 principal

$70

Check from net income of $120$120 + $40 − $50 − $15 − $25

$70

What the interviewer listens for

• Do you tie each one to the value it produces and its discount rate?
• Can you get from one to the other through interest and principal?
• Do you start each build at the right line of the income statement?
• Can you put numbers on it quickly?

Common mistakes

• Calling levered free cash flow the same as cash from operations.Operating cash flow still has capex and required principal to come out.
• Quoting a share price straight from an unlevered DCF.It gives enterprise value, so you still owe the bridge to equity first.
• Assuming levered is always the smaller number.A company with net cash earns interest, so with no principal due its levered free cash flow can be the larger one.
• Treating optional debt paydown as required.Only scheduled principal comes out of levered free cash flow, while extra paydown is a use of it.

Likely follow-ups

• If the company refinances at a lower rate, which one moves?Only levered. Lower interest leaves more for shareholders after tax, while unlevered free cash flow ignores financing entirely.
• Which one would you use to judge whether a company can pay its dividend?Levered, because it's the cash left after the lenders are paid. A dividend that runs above it for years is being paid with borrowing or with cash on hand.

More finance technicals

• What are net operating losses, and how are they used?
• What's the difference between cash and accrual accounting?
• What creates a deferred tax asset?
• How do you account for a 30% stake in another company?
• How do the three financial statements link together?

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