Debt-Adjusted Cash Flow (DACF)
What Is Debt-Adjusted Cash Flow (DACF)?
Debt-adjusted cash flow (DACF) is a financial metric that represents pre-tax operating cash flow (OCF) adjusted for financing expenses after taxes. It is most regularly used to examine oil companies. Changes for exploration costs may likewise be incorporated, as these differ from one company to another depending on the accounting method utilized.
By adding the exploration costs, the effect of the different accounting methods is eliminated. DACF is helpful in light of the fact that companies finance themselves in an unexpected way, with some depending more on debt.
Understanding Debt-Adjusted Cash Flow (DACF)
Debt-adjusted cash flow (DACF) is frequently utilized in valuation since it adapts to the effects of a company's capital structure. In the event that a company utilizes a ton of debt, the generally utilized Price/Cash Flow (P/CF) ratio might demonstrate the company is moderately cheaper than if its debt were considered.
P/CF is the ratio of the company's stock price to its cash flow. In the event that a company employs debt, its cash flow might be helped while its share price is unaffected, bringing about a lower P/CF ratio and making the company look moderately cheap.
The EV/DACF ratio eliminates this problem. EV, or enterprise value, mirrors the amount of debt a company has, and DACF mirrors the after-tax cost of that debt. The valuation ratio EV/EBITDA is involved normally to examine companies in different industries, including oil and gas. Be that as it may, in oil and gas, EV/DACF is likewise utilized as it adapts to after-tax financing costs and exploration expenses, considering an apples-to-apples comparison.
Ascertaining DACF
Debt-adjusted cash flow is calculated as follows:
DACF = cash flow from operations + financing costs (after tax)
Enterprise Value/Debt-Adjusted Cash Flow
Analysts might see debt-adjusted cash flow to help in fundamental analysis or create valuation metrics for a company's shares. Enterprise Value to Debt-Adjusted Cash Flow (EV/DACF) is one such measure. Enterprise value (EV) is a measure of a company's total value, frequently utilized as a more comprehensive alternative to equity market capitalization.
EV remembers for its calculation the market capitalization of a company yet additionally short-term and long-term debt as well as any cash on the company's balance sheet. Enterprise value is a popular measurement used to value a company for a potential takeover.
EV/DACF takes the enterprise value and partitions it by the sum of cash flow from operating activities and every financial charge. The capital structures of different oil and gas firms can be decisively unique. Firms with higher levels of debt will show a better price-to-cash flow ratio, which is the reason a few analysts prefer the EV/DACF multiple.
The EV/DACF multiple takes the enterprise value and partitions it by the sum of cash flow from operating activities and all financial charges including interest expense, current income taxes, and preferred shares.
Features
- Debt-adjusted cash flow is calculated as (DACF = cash flow from operations + financing costs (after tax))
- DACF accounts for financing expenses after taxes and changes for the costs of oil and gas exploration to streamline any differences in accounting methods between firms.
- The EV/DACF multiple takes the enterprise value and partitions it by the sum of cash flow from operating activities and all financial charges including interest expense, current income taxes, and preferred shares.
- The EV/DACF multiple is utilized as a valuation metric for companies in this industry sector.
- Debt-adjusted cash flow (DACF) is utilized to break down companies in the oil and gas industry.
