| Isn't EBIT a better measure of true earnings power (than some cash flow metric)? Posted: 09 May 2020 10:05 AM PDT Cash flow metrics usually do the following: - Add back D&A and deduct capex - but why not just use D&A as maintenance capex and leave it? It's as good an approximation as you're probably going to get for most businesses anyway.
- The D&A will usually include some portion of capital lease expense - but that's a proper expense of running the business and should be left deducted. And now that operating leases are starting to be treated the same way, their contribution to D&A should also stay deducted. Maybe the interest component of the lease should be further deducted from EBIT.
- Add back SBC as a non-cash expense - but it really is a cost and should be left deducted in opex. Economically speaking, this is more like a financing cash flow and not really to do with operations.
- Add back changes in net working capital - similar to SBC, is it really cash you can pull out of the business, or is it a form of financing which shouldn't be added back to earnings power?
- Add back one-time non-cash write-downs - but if they occur regularly, should be left deducted from true earnings power. You're just shifting the "expense" from one year to another. The cash went out the door at some point, even if you're only recognizing the loss later on when it happens to be non-cash. The loss should be recognized somewhere, even though non-cash.
- Add back / subtract deferred income tax - similar to non-cash write-downs, aren't you just shifting the timing of the tax liability from one year to another?
So if we're trying to approximate true earnings power or economic earnings of the total enterprise, doesn't good old EBIT do a pretty good job? Maybe do a trendline of the last 10 years of EBIT to account for whether the "one-time" add-backs are really non-recurring. What am I missing here? submitted by /u/kitedancing [link] [comments] |
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