Cash Flow from Assets
The Cash Flow from Assets measures the cash flows generated by the firm's assets. It is also known as the Cash Flow of the Firm. These cash flows will be further categorized as Operating Cash Flow, Capital Spending, and Additions to Net Working Capital. The calculations illustrated on this page will refer to the Balance Sheet and Income Statement which follow.
Operating Cash Flow
Operating Cash Flow measures the cash flows generated by the firm's main operations. (In effect, the ability of the firm to sell its products for more than the cost of production.) Operating Cash Flow can be determined as follows:
Operating Cash Flow = EBIT + Depreciation - Taxes
The calculation begins with EBIT (Earnings before Interest and Taxes) because Interest Expense is not a cash flow that operations are dependent upon. Interest Expense reflects how the firm chooses to finance its assets, not its ability to operate them successfully. Depreciation Expense (from the Income Statement) is added back because it is a non-cash expense which was subtracted out in the determination of EBIT. Finally, the taxes which the firm actually paid in cash during the period are subtracted.
Capital Spending reflects the firm's net investment in fixed assets during the period. It can be calculated as follows:
In this calculation, Depreciation Expense (from the Income Statement) must be added back because the balance for Ending Net Fixed Assets on the Balance Sheet is reduced by the Depreciation Expense which was incurred during the period.
Additions to Net Working Capital
Additions to Net Working Capital measure the firm's investment in Net Working Capital during the period. Net Working Capital (NWC) is defined as Current Assets minus Current Liabilities.
Additions to NWC = Ending NWC - Beginning NWC
Cash Flow from Assets
Once the above items have been determined, the Cash Flow from the Firm's Assets can be calculated as follows:
A healthy firm would be expected to generate positive cash flow. However, if the firm is young and/or is investing heavily to promote growth, then a negative Cash Flow from the Firm's Assets may be excused.
© 2002 - 2010 by Mark A. Lane, Ph.D.