What characterizes unlevered free cash flow (FCF)?

Unlevered free cash flow (FCF) is defined as the cash generated by a company's operations that is available to all capital providers, including both equity and debt holders, without considering the effects of financial leverage. The critical aspect that distinguishes unlevered free cash flow is that it excludes interest expenses associated with debt financing. By disregarding interest, unlevered free cash flow provides a clearer view of the company’s operational performance and its ability to generate cash from its core business activities.

This measure is particularly valuable for valuation methodologies such as Discounted Cash Flow (DCF) analysis, where it allows analysts to assess the intrinsic value of the business without the distortions that may arise from leverage.

This definition aligns with standard financial practices and metrics, highlighting the importance of analyzing a company's operating cash flow independent of its debt obligations, providing a better understanding of its financial health and operational efficiency.