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Cash Flow Metrics Comparison

EBIT EBITDA EBITDAR Net Income NOPAT / NOPLAT FCFF FCFE

aka Operating Income Net Profit Tax-Effected EBIT Unlevered Free Cash Flow Levered Free Cash Flow

Calculation On Income Statement Operating Income +

D&A Operating Income + D&A +

Rent Expense On Income Statement EBIT * (1 – T)

EBIT * (1 – T) + D&A – CapEx + ΔWC

Net Income + D&A – CapEx + ΔWC + ΔDebt

Valuation Metric Enterprise Value Enterprise Value Adjusted Enterprise Value Equity Value Enterprise Value Enterprise Value Equity Value

Valuation Multiple TEV / EBIT TEV / EBITDA Adjusted TEV / EBITDAR Equity Value / NI TEV / NOPAT Not Meaningful Not Meaningful

Financial Stakeholders

Equity, Debt, Preferred, Gov’t, MI s/h

Equity, Debt, Preferred, Gov’t, MI s/h

Equity, Debt, Preferred, Gov’t, MI s/h

Equity only Equity, Debt, Preferred,

MI s/h Equity, Debt, Preferred,

Gov’t, MI s/h Equity only

Explanation

Recurring sustainable profit from core

operations before the effects of capital

structure & leverage

Proxy for cash flow to all financial stakeholders

before effects of capital structure & leverage

Important for industries in which there is a lease vs.

buy decision in COGS, typically transport (but

not retail!)

Profit to equity stakeholders after the

effects of capital structure & leverage

Similar but not equal to Net Income; as if no debt and interest, so

pre-capital structure & leverage

Calculates discretionary free cash flow to financial

stakeholders

Net cash flow to Equity stakeholders after

interest expense; easily manipulated via capital

structure changes

Comparison vs. Other Metrics

Does not add back D&A since EBIT includes all legitimate expenses

Adds back D&A to better approximate cash flow since D&A is non-cash

Allows comparison of firms that buy vs. lease in

the same industry

Net figure, after all other stakeholders’

claims have been “paid”

Typically used in Economic Analysis and EVA for compensation

Used primarily for DCF valuation models

To be avoided at all costs; use upon penalty

of death

CapEx Relationship Ignores CapEx Ignores CapEx Ignores CapEx Ignores CapEx Ignores CapEx Incorporates CapEx Incorporates CapEx

Interest Relationship

Pre-Interest Pre-Interest Pre-Interest Post-Interest Pre-Interest Pre-Interest Post-Interest

Income Tax Relationship

Pre-Taxes Pre-Taxes Pre-Taxes Post-Taxes Post-Taxes Post-Taxes Post-Taxes

Core vs. Non-Core Core Business Only Core Business Only Core Business Only Includes Non-Core $ Core Business Only Core Business Only Includes Non-Core $

Credit Ratios Significance

Very important for interest coverage

Critical for Debt/EBITDA and interest coverage

Sometimes important for financial covenant ratios

Not Important Not Important Not Important Not Important

Use Case(s)

(1) include the effect of CapEx and D&A

(2) also when CapEx / D&A) is fairly significant

Cash flow based firms (services) and capital intensive businesses

(manufacturing)

Same as EBITDA and normalize the impact of buy vs. lease decisions in

same industry sector

(1) ROE, ROA, ROC, etc. (2) Exclude impact of

stock buybacks (3) Private company PE

Economic Value Added analysis

Discounted Cash Flow valuation

Virtually none

Pitfalls

(1) further removed from cash flow figure

(2) Excludes CapEx which reduces cash flow

(3) Includes MI s/h $

(1) D&A is legit expense (2) Excludes CapEx

which reduces cash flow (3) Includes MI s/h $

Only relevant for some industries

After the effects of capital structure

impossible to ascertain source of profitability

Somewhat irrelevant in valuation context

Not true cash figure since starts with EBIT still

subject to manipulation of accrual accounting

To be avoided at all costs; use upon penalty

of death

Legend: EBIT = Earnings Before Interest and Taxes; EBITDA = Earnings Before Interest and Taxes and Depreciation and Amortization; EBITDAR = EBITDA + Rent; T = tax rate NOPAT = Net Operating Profit After Tax; NOPLAT = Net Operating Profit / Loss After Tax; FCFF = Free Cash Flow to Firm; FCFE = Free Cash Flow to Equity TEV = Total Enterprise Value; never use the acronym EV since it is unclear if it is in reference to Enterprise or Equity Value; Adjusted Enterprise Value = TEV + Off-Balance Sheet Operating Leases TEV = Equity Value + Net Debt (excluding capital leases) + Preferred + Minority Interest (and in Oilfield Services & Equipment: + Investment in Affiliates) MI s/h = Minority Interest shareholders; PE = Price / Earnings ratio; ROE, ROA, ROC = Return on Equity, Assets and Capital (Debt + Equity)