Levered Free Cash Flow - Explained
What is Levered Free Cash Flow?
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Table of ContentsWhat is Levered Free Cash Flow?How Does a Levered Free Cash Flow Work?Using Levered Free Cash Flow in Stock Analysis
What is Levered Free Cash Flow?
Levered free cash flow is important as it is the sum of money paid to shareholders or spent on other investments. It is the amount of money or transaction balance available to a company after satisfying all financial obligations. When the amount of money generated cannot cover the company's financial commitments then the levered cash flow is negative even when the operating cash flow is positive.
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How Does a Levered Free Cash Flow Work?
A company having a levered cash flow shows that the company is able to pay its shareholders the returns on its investment and has great potential to expand. Unhealthy Levered cash flow decides the inability of a company to obtain additional capital financing from a lender but when the levered cash flow is stable and healthy, it makes the company looks promising and at low risk for the lender. In other words, levered cash flow is one of the indices of obtaining additional capital finance. The Levered and unlevered cash flow is calculated in a company cash flow report but investors and others are quite interested in the levered cash flow as it reports investment risk level. The amount of cash available to a company before satisfying its financial obligations is termed unlevered cash flow which contrasts the levered cash flow. Here are some things to note about levered cash flow;
- Levered cash flow is the amount of money or transaction balance available to a company after satisfying all financial obligations.
- This can be used as either dividend to investors or for investing in the business or other businesses.
- It is important to note that even while the amount of money used in operations can be steadily available, the levered cash flow can be empty.
Using Levered Free Cash Flow in Stock Analysis
When the company has no levered cash flow or no amount of money left having satisfied all financial obligations, this does not mean the company is failing but could be as a result of capital investments embarked upon by the company. This means that the company will yield the returns on these capital investments and the period of the negative levered cash flow will be over as a result of increased revenue. It is just necessary for the company to be able to survive before yielding returns on investment. A company can decide to use its levered cash flow to pay a higher amount of dividends to investors so as to attract more investors or invest in the market so as to create room for business growth and expansion. Companies that devote their levered cash flow to investors dividends may do so to attract investors or out of sheer ignorance of investment in growth opportunities.