What are the steps to calculate Unlevered Free Cash Flow (UFCF)?

To calculate Unlevered Free Cash Flow (UFCF), the process begins with EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This is the preferred starting point because it provides a measure of a company's operational performance without the effects of capital structure, making it a suitable basis for assessing the cash flow generated by the firm's operations.

From EBITDA, you subtract depreciation and amortization, which represent non-cash expenses that account for the allocation of the cost of tangible and intangible assets over time. These adjustments are crucial as they provide a clearer view of cash generated from operations without the influence of accounting policies regarding asset depreciation.

Next, it is necessary to adjust for taxes, as UFCF represents all cash flows prior to financing impacts. By accounting for taxes, you ensure that the cash flow reflects the actual earnings available before they are influenced by debt financing or tax shields.

Finally, subtracting capital expenditures (CapEx) is essential because these are real cash outflows necessary for maintaining or expanding the asset base of the company. Deducting CapEx from the adjusted EBITDA thus gives the final measure of UFCF, capturing the cash available to all investors in the business, including both equity and debt holders.

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