What levered free cash flow means
Levered free cash flow starts after interest and taxes, then accounts for operating reinvestment and net borrowing. It estimates cash that could be distributed to common shareholders without changing the modeled operating and financing plan.
FCFE is used to estimate equity value directly and is discounted at the cost of equity. Unlike an FCFF valuation, the result does not require subtracting net debt afterward because debt financing has already affected the cash flow.
The term levered FCF is not used consistently. Some company-analysis pages call CFO minus CapEx levered FCF because operating cash flow is after interest. A full FCFE model also includes net borrowing. State the convention instead of relying on the label alone.
How to calculate levered free cash flow
Begin with earnings available to common shareholders, then reconcile non-cash charges, reinvestment and debt flows.
- 1
Start with normalized net income attributable to common shareholders.
- 2
Add back depreciation, amortization and other included non-cash operating charges.
- 3
Subtract the increase in non-cash net working capital.
- 4
Subtract capital expenditures needed by the operating plan.
- 5
Add net borrowing, calculated as new debt issued minus debt principal repaid.
Levered free cash flow example
Assume the following annual equity-level inputs, in USD millions.
| Starting point | Formula or value | When to use it |
|---|---|---|
| Net income | $700 | After interest and taxes |
| D&A | $120 | Non-cash charge added back |
| Increase in NWC | $50 | Cash absorbed by operations |
| CapEx | $200 | Operating reinvestment |
| Net borrowing | $30 | Debt issued minus debt repaid |
$700 + $120 − $50 − $200 + $30 = $600 million of FCFE.
The modeled business generated $600 million for common equity after reinvestment and planned debt flows. An equity-value DCF would discount projected FCFE at the cost of equity.
FCFE formulas from different starting points
Each derivation should reach equity-holder cash flow when financing items are treated consistently.
| Starting point | Formula or value | When to use it |
|---|---|---|
| Net income | NI + D&A − ΔNWC − CapEx + net borrowing | Standard earnings-based FCFE formula |
| Cash from operations | CFO − CapEx + net borrowing | Shortest route when CFO and debt cash flows are available |
| FCFF | FCFF − interest × (1 − T) + net borrowing | Converts firm cash flow to equity cash flow |
Levered vs. unlevered free cash flow
Do not mix equity cash flows with enterprise-value discount rates or valuation denominators.
| Metric | Core formula | Cash belongs to | DCF discount rate |
|---|---|---|---|
| FCFE / LFCF | After debt financing flows | Common equity holders | Cost of equity |
| FCFF / UFCF | Before debt financing flows | Debt and equity providers | WACC |
| Simple FCF | CFO − CapEx | Definition must be stated | Depends on adjustments |
Common FCFE mistakes
- Ignoring net borrowing when debt issuance and repayment are material to the equity cash flow.
- Adding total debt issued without subtracting principal repayments.
- Discounting FCFE with WACC and then subtracting net debt again.
- Treating temporary borrowing used to cover a working-capital swing as sustainable shareholder cash generation.
Levered free cash flow FAQ
Is levered free cash flow the same as FCFE?
They are often used as synonyms, but terminology varies. A full FCFE formula includes net borrowing; some simple levered FCF definitions use only CFO minus CapEx. State the formula explicitly.
Why is net borrowing added to FCFE?
New borrowing supplies cash that can support equity holders, while debt repayment consumes cash. Net borrowing captures the difference between those financing flows.
What discount rate should be used for FCFE?
Use the cost of equity because FCFE belongs only to common shareholders. WACC is paired with FCFF and enterprise value instead.
The practical takeaway
FCFE is useful when leverage policy can be modeled reliably and the goal is equity value directly. Include net borrowing, use the cost of equity, and avoid subtracting net debt a second time.