Levered Free Cash Flow ("LFCF") represents the amount of Free Cash Flow before accounting for interest expense and interest income.
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Loving this section of the course so far guys. A quick question in regards to Levered Free Cash Flow: Online I’ve noticed other people calculate Levered Free Cash Flow as Cash Flow from Operations – Total CapEx – debt repayment, which would would then give us the free cash flow left for equity investors. However, we’re calculating Levered Free Cash Flow as Cash Flow from Operations – Total CapEx, and we don’t minus the debt repayment. Why is this? I thought the calculation we’re using for Levered Free Cash Flow here is the calculation to find general… Read more »
Hi Nathan, This is a great question. Subtracting debt repayments in LFCF is wrong. It started with one popular investment banking-oriented website and then other websites referenced that website and now many people use this wrong formula. That’s one of the reasons we decided to create Lumovest. Let’s set formula aside and establish the concept of Levered Free Cash Flow. Conceptually, LFCF represents the amount of cash that the company generated that belong to equity investors. All the expenses and expenditures have been paid for and this is the money that can go into equity investors’ pocket. … Read more »
Can you explain what is the working capital ? Thanks
Hi Eddie, The “capital” part means money. Therefore, you can think of “Working Capital” as just money being tied up working in the business operations. Here’s an example. Let’s say the business generated $100 of Revenue. So on the Income Statement, the company records $100 of Revenue. But that doesn’t necessarily mean all of that $100 has been received by the company in cash. The company may have delivered the product, but the customer may not have paid yet. In this case, the $100 is an Accounts Receivable and is currently still “working” in the business operations and not yet… Read more »
Got it! Thank you for your detailed explanation!
Love what you guys doing here! Amazing work!