Investing in commercial property is one of several ways a company can expand its reach in a priority market.
But before you dive into a new investment, you need to understand how much money your company is making prior to paying off the debts you already have first. Calculating your company’s unlevered free cash flow can tell you how much money you have to invest in a new property in order to grow your business and keep stakeholders happy.
What is Unlevered Free Cash Flow (UFCF)?
Unlevered free cash flow is defined by how much money is brought in by a company before accounting for interest payments. It shows how much cash is available to the company before financial analysts think about any other financial obligations. Unlevered means that the free cash flow is free of leverage, or debt, and accurately depicts the amount of cash available to pay all stakeholders including both debt and equity holders.
These financial obligations signify the difference between unlevered free cash flow and levered free cash flow. Free cash flow is the amount of money a company has after paying expenses for operation and other capital expenditures.
The UFCF formula calculates how much money is flowing into your business through numbers from earnings before interest and taxes (EBIT), depreciation and amortization, and capital expenditures.
Free Cash Flow = Net Income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure
UFCF and Commercial Real Estate
Any potential investor, whether they’re investing in stocks, annuities, or real estate, must calculate their UFCF to assess whether an investment is wise.
For the commercial real estate investor, UFCF not only indicates how much money your company has to expand but also takes into account the buildings and properties you already own.
Considering the amount of cash that’s available to you outside of your capital structure can help grow your business, but it’s also extremely important in assessing how your current real estate investments are performing. UFCF can tell you whether the money you are spending in buying, building, or renovating a property is worth the long-term result. By knowing UFCF early, you can make purchasing and selling decisions before taking any risky investments.
UFCF can also show the difference between two potential property assets. Because the UFCF removes the entire capital structure, it can show a clear picture of the enterprise values of all the properties you are considering.
Calculating unlevered free cash flow is an essential step in any investing process. By assessing a company’s current net income without accounting for debts and other expenditures, you can decide whether a potential asset could grow your business and is worth the price.