Valuation Updated November 2026

Unlevered free cash flow

Unlevered free cash flow (UFCF) = EBIT x (1 - tax rate) + D&A - capital expenditures - increase in net working capital. It is the cash available to all capital providers before any interest, so it is discounted at WACC in a DCF.

Syntax

UFCF = EBIT x (1 - t) + D&A - CapEx - change in NWC

Part	What it is
`EBIT`	Operating profit before interest and tax
`t`	Tax rate applied to EBIT, giving NOPAT
`D&A`	Depreciation and amortization, added back because they are non-cash
`change in NWC`	Increase in net working capital; an increase reduces cash, a decrease adds cash

Examples

EBIT 300, tax 25%, D&A 60, CapEx 90, NWC increase 15
=300 * (1 - 25%) + 60 - 90 - 15

Result: 180

NOPAT is 225.

From EBITDA: EBITDA 360, D&A 60, tax 25%, CapEx 90, NWC increase 15
=(360 - 60) * (1 - 25%) + 60 - 90 - 15

Result: 180

Same answer: tax is charged on EBIT, then D&A is added back.

NWC decreases by 10 instead of increasing by 15
=225 + 60 - 90 + 10

Result: 205

Common mistakes

Taxing EBITDA instead of EBIT: depreciation is tax deductible, so tax must be computed on EBIT and D&A added back afterward.
Subtracting interest: UFCF is before interest by definition; interest only enters through WACC.
Using the wrong sign on working capital: an increase in NWC is a cash outflow and must be subtracted.

Practice Unlevered free cash flow

These drills check your answer on live data, free, no account needed.

Unlevered free cash flowFill NOPAT (row 6: EBIT after tax at the rate in B2) and unlevered free cash flow (row 10: NOPAT plus depreciation, less capital spending, less the increase in working capital).
Working capital from daysForecast the working capital balances from the day counts in B2:B4: receivables from revenue, inventory and payables from cost of goods sold, each as days out of 365. Then net working capital is receivables plus inventory less payables.

Questions

Why is UFCF before interest?

Because WACC already includes the after-tax cost of debt. Taking interest out of the cash flow and out of the discount rate would count it twice.

Should stock-based compensation be added back in UFCF?

Many analysts treat it as a real cost and do not add it back, or add it back and count the dilution in the share count. Pick one approach and state it.

Free cash flowFree cash flow is cash from operations minus capital expenditures. The simple formula, the free cash flow to equity version and examples with exact numbers.
WACCWACC = E/V x cost of equity + D/V x cost of debt x (1 - tax rate). Cost of equity from CAPM, market value weights, an example giving 9.0% and common errors.
Change in net working capitalChange in NWC = NWC this year - NWC last year. An increase uses cash and is subtracted in free cash flow; a decrease releases cash. Formula, examples, signs.
DCF model stepsThe six steps of a DCF: forecast unlevered free cash flow, set WACC, compute terminal value, discount it all, bridge to equity value and divide by shares.