Cash Flow After Taxes (CFAT)
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 like amortization, depreciation, restructuring costs, and impairment to net income. CFAT is otherwise called after-tax cash flow.
Figuring out Cash Flow After Taxes (CFAT)
CFAT after taxes is a measure of cash flow that considers the impact of taxes on profits. This measure is utilized to decide the cash flow of an investment or project embraced by a corporation. To compute the after-tax cash flow, depreciation must be added back to net income. Depreciation is a non-cash expense that addresses the declining economic value of an asset yet is definitely not a genuine cash outflow. (Recall that depreciation is deducted as an expense to compute profits. In computing CFAT, it is added back in.)
Here is the formula for ascertaining CFAT:
CFAT = net income + depreciation + amortization + other non-cash charges
For instance, we should expect a project with a operating income of $2 million has a depreciation value of $180,000. The company pays a tax rate of 35%. The net income generated by the project can be calculated as:
Earnings before tax (EBT) = $2 million - $180,000
EBT = $1,820,000
Net income = $1,820,000 - (35% x $1,820,000)
Net income = $1,820,000 - $637,000
Net income = $1,183,000
CFAT = $1,183,000 + $180,000
CFAT = $1,363,000
Depreciation is an expense that acts as a tax shield. Nonetheless, as it's anything but a real cash flow, it must be added back to the after-tax income.
Everything CFAT Can Say to Investors
The current value of cash flow after taxes can be calculated to conclude whether an investment in a business is advantageous. CFAT is important for investors and analysts since it measures a corporation's ability to meet its cash obligations, for example, an increase in working capital and payroll to support growth, make cash investments in fixed assets, or at last and over the long haul, make cash dividends or distributions.
The higher the CFAT, the better-positioned a business is to make distributions. Nonetheless, a positive CFAT doesn't be guaranteed to mean that a company is in a sufficiently solid financial position to follow through with its cash distributions.
CFAT likewise measures a company's financial wellbeing and performance over the long run and in comparison to contenders inside a similar industry. Various industries have various levels of capital intensity and along these lines various levels of depreciation. While cash flow after taxes is an incredible method for deciding if a business is generating positive cash flows after the effects of income taxes have been incorporated, it doesn't account for cash expenditures to secure fixed assets.
Features
- CFAT measures a company's financial wellbeing and performance after some time and can measure up to the CFAT of contenders inside a similar industry.
- To compute CFAT, non-cash charges like amortization, depreciation, restructuring costs, and impairment are added back to net income.
- Cash flow after taxes (CFAT) looks at a company's ability to generate cash flow through its operations.
- CFAT can decide the cash flow of an investment or project embraced by a corporation.
