What Is Cash Flow After Taxes? (CFAT)

Cash flow after taxes (CFAT) is a measure of financial performance that shows a company's ability to generate cash flow through its operations. It is calculated by adding back non-cash charges, such as amortization, depreciation, restructuring costs, and impairment, to 澳洲幸运5官方开奖结果体彩网:net income. CFAT is also known as after-tax cash flow.

Understanding Cash Flow After Taxes (CFAT)

CFAT is a measure of cash flow that takes into account the impact of ta💫xes on profits. It can be used to determine the cash flow of an investment, a project, or an entire company.

To calculate 澳洲幸运5官方开奖结果体彩网:after-tax cash flow, you must add 澳洲幸运5官方开奖结果体彩网:depreciation, amortization, and other non-cash charges back to 澳洲幸运5官方开奖结果体彩网:net income. Depreciation is a 澳洲幸运5官方开奖结果体彩网:non-cash expense that repre♊sents the declining economic value of a physical asset, such as a piece of machin🌺ery or a fleet of trucks, but is not an actual cash outflow. Amortization is much like depreciation but for intangible assets, such as copyrights or trademarks. (Depreciation and amortization are both subtracted as expenses to calculate net profits. In calculating CFAT, they are added back in.)

Many investors consider cash flow to be a more reliable and trustworthy measure of a company's financial health than profits. That's because non-cash expenses, such as depreciation, are more easily manipulated through 澳洲幸运5官方开奖结果体彩网:"creative accounting" to make a company appear profitable, at least on paper.

How to Calculate Cash Flow After Taxes (CFAT)

Here is the formula for calculating CFAT:

$\begin{aligned}&\textbf{CFAT} = \text{net income} + \text{d} + \text{a} + \text{oncc}\\&\textbf{where:}\\&\text{d}=\text{Depreciation}\\&\text{a}=\text{Amortization}\\&\text{oncc}=\text{Other non-cash charges}\end{aligned}$​CFAT=net income+d+a+onccwhere:d=Depreciationa=Amortizationoncc=Other non-cash charges​

For example, let's assume a project with an 澳洲幸运5官方开奖结果体彩网:operating income of $2 million has a depreciation value of $180,000 and no amortization. The company pays a combined federal and state tax rate of 25%. The net 🍒income generated by the project ca⛄n be calculated as:

澳洲幸运5官方开奖结果体彩网:Earnings before tax (EBT) = $2 million - $180,000

EBT = $1,820,000

Net income = $1,820,000 - (25% x $1,820,000)

Net income = $1,820,000 - $455,000

Net income = $1,365,000

CFAT = $1,365,000 + $180,000

CFAT = $1,545,000

Depreciation is an expense that acts as a 澳洲幸运5官方开奖结果体彩网:tax shield. However, as it is not an actual cash flow, it must be added back to the after-tax income to produce a more acc꧂♒urate picture of cash flow.

What CFAT Can Tell Investors

The 澳洲幸运5官方开奖结果体彩网:present value of cash flow after taxes can be calculated to decide whether or not an investment in a business is worthwhile. CFAT is important for stock investors and analysts because it gauges a corporation's ability to meet its cash obligations, such as an increase in 澳洲幸运5官方开奖结果体彩网:working capital and payroll to support growth, make cash investments in fixed assets, or eventually and in the long run, issue 澳洲幸运5官方开奖结果体彩网:cash dividends or distrඣibutions. The higher the CFAT, the better positioned a business is to make distributions to investors.

CFAT can also be used as a measure of a company's financial health and performance over time and in comparison to competitors within the same industry. Different industries have different levels of capital intensity and thus different levels of depreciation. While cash flow after taxes is a good way to determine whether a business is generating positive cash flows after the effects of income taxes have been taken into consideration, it does not account for cash expenditures used to acquire 澳洲幸运5官方开奖结果体彩网:fixed assets, which will vary among industries.

The Bottom Line

Cash flow after taxes (CFAT) can be a useful measure of a company's financial health and its ability to generate sufficient cash to meet its (and its investors') needs. In comparing CFAT among different companies, it is important to recognize that cash needs can vary widely from one industry to another, so it's best to compare companies in the same or very similar industries.