To predict cash flows, which calculation is suggested?

• A. Calculate EBIAT and subtract capex, change in NWC, and D&A
• B. Net income plus depreciation
• C. EBITDA as cash flow
• D. Revenue less COGS

Answer: (A)

The main idea is forecasting cash flows using cash-based profitability that isn’t distorted by financing. Start from after-tax operating income (NOPAT/EBIAT), which captures how much the business earns from its core ops after taxes, independent of debt. To convert that into cash flow, adjust for non-cash charges and for the real cash outlays tied to running and growing the business: add back depreciation and amortization (these are non-cash deductions that reduced earnings but did not use cash), and subtract the actual cash investments in the business—capital expenditures and the net change in working capital. The result is unlevered free cash flow, the cash available to all providers of capital.

Why the other simple approaches fall short: EBITDA ignores taxes and working capital needs, so it overstates cash flow; revenue minus COGS misses many operating costs and taxes, giving an incomplete view of cash; net income plus depreciation is closer but still omits tax and working capital effects, which are essential to understanding true cash generation. The key takeaway is to anchor on after-tax operating profit and convert it to cash by adding back non-cash charges and subtracting the cash outlays for sustaining and expanding the business.