Once your income statement and balance sheet are built, you can finally shift focus to the most actionable part of the DCF: cash flow. Specifically, we're looking at Unlevered Free Cash Flow (UFCF)—the cash available to all capital providers, before considering interest or debt payments.

UFCF strips the company down to its core performance by removing the effects of financial structure. This makes it a powerful, clean metric for valuation, especially when used in DCF models that calculate enterprise value.

The UFCF formula is:

Each of these components ties directly back to your income statement or balance sheet:

• EBIT captures operating performance before financing and taxes;

• Depreciation & Amortization are non-cash charges that need to be added back;

• CapEx reflects investment in long-term assets—cash going out;

• Change in Working Capital accounts for operational cash tied up in current assets and liabilities.

Unlike net income, UFCF gives a truer picture of how much cash the business actually generates and reinvests. It doesn't depend on how the company is financed, which makes it the ideal foundation for calculating DCF-based enterprise value.

Building UFCF is a critical transition point. It's where your model stops looking backward at history and starts projecting future performance into real, cash-driven value.