hard · Investment Banking
Why is 'Unlevered Free Cash Flow' (UFCF) the correct numerator to pair with 'Enterprise Value' in a valuation multiple?
- UFCF excludes depreciation, which makes it more comparable to the Enterprise Value of companies with different asset intensities.
- Enterprise Value already includes cash, so we must use a cash flow metric that also includes interest income.
- UFCF is the cash flow available to all capital providers (debt and equity) before any financing decisions, and EV represents the value of the firm's total operations available to those same providers.
- UFCF is the only metric that accounts for the tax shield provided by debt, which is a key part of Enterprise Value.
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