What is Cash Flow After Taxes (CFAT)?
Cash flow after taxes (CFAT) is a measure of a company's ability to generate positive cash flow after deducting taxes.
How Does Cash Flow After Taxes (CFAT) Work?
The general formula for CFAT is:
CFAT = Net Income + Depreciation + Amortization
Sometimes analysts also add back other non-cash items and proceeds from debt or equity issuance.
Let's assume Company XYZ made $1,000,000 of net income by selling widgets last year. One of its expenses (on the income statement) was $25,000 of depreciation on its equipment. Using the formula above, we can calculate that Company XYZ's CFAT was:
CFAT = $1,000,000 + $25,000 = $1,025,000
note that net income, by definition, is after taxes. Thus, CFAT is also an after-tax measure.
Why Does Cash Flow After Taxes (CFAT) Matter?
The biggest reason analysts and investors use CFAT is to determine whether a company has the money to pay a cash dividend or distribution (note that having a positive CFAT does not automatically mean it's prudent for the company to pay a dividend or distribution).
It is important to note that different industries have different levels of capital intensity (and thus different levels of depreciation and amortization). Thus, comparisons of CFAT are best made among companies within the same industry.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
With more than a million new job listings every month, Craigslist is flush with opportunities in every industry. Seasonal retail jobs, research assistants, project managers, tanning salon...
Read More →
Some investors have found their niche scouring the market for the next target of a...
Read More →
Used cars today are a great buy. No longer is the 100,000 mile mark a warning sign as much as it is a "deep discount" sign. In fact, owners of Toyotas, Hondas and Subarus will tell you that...
Read More →
With more than 45,000 stocks listed on major exchanges around the world, it’s easy to throw up your...
Read More →
In my first trading lesson I defined technical analysis and ...
Read More →
