Cash Flow Metrics Comparison - Wall St. Training

1 Wall St. Training cash flow Metrics Comparison EBIT EBITDA EBITDAR Net Income NOPAT / NOPLAT aka Operating Income Net Profit Tax-Effected EBIT Calculation On Income Statement Operating Income + D&A Operating Income + D&A + Rent Expense On Income Statement EBIT * (1 T) Valuation Metric Enterprise Value Enterprise Value Adjusted Enterprise Value Equity Value Enterprise Value Valuation Multiple TEV / EBIT TEV / EBITDA Adjusted TEV / EBITDAR Equity Value / NI TEV / NOPAT 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 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.

2 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 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 CapEx Relationship Ignores CapEx Ignores CapEx Ignores CapEx Ignores CapEx Ignores CapEx Interest Relationship Pre-Interest Pre-Interest Pre-Interest Post-Interest Pre-Interest Income Tax Relationship Pre-Taxes Pre-Taxes Pre-Taxes Post-Taxes Post-Taxes Core vs.

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

4 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) Wall St. Training cash flow Metrics Comparison FCFF FCFE NOI FFO AFFO aka Unlevered Free cash flow Levered Free cash flow Net Operating Income Funds from Operations Adjusted FFO, CAD or FAD (Cash/Funds Available for Distribution) Calculation EBIT * (1 T) + D&A CapEx + WC Net Income + D&A CapEx + WC + Debt Real Estate Revenue Operating Expenses NI + D&A + Gains/Losses on Property Sales FFO recurring CapEx & adjust Straight Line Rents Valuation Metric Enterprise Value Equity Value Enterprise Value Equity Value Equity Value Valuation Multiple Not Meaningful Not Meaningful NOI / Cap Rate = TEV Equity Value/ FFO (or Price per FFO / Share) Equity Value / AFFO (or Price per AFFO / Share)

5 Financial Stakeholders Equity, Debt, Preferred, Gov t, MI s/h Equity only Equity, Debt Preferred, MI s/h Equity only Equity only Explanation Calculates discretionary free cash flow to financial stakeholders Net cash flow to Equity stakeholders after interest expense; easily manipulated via capital structure changes Similar to EBITDA but for real estate projects at the property level and REITs Measure of cash flow designed by NAREIT in 1991 to address drawbacks of GAAP EPS Measures operating cash flow generated for a REIT after providing for operating CapEx Comparison vs. Other Metrics Used primarily for DCF valuation models To be avoided at all costs; use upon penalty of death Excludes any below the line items; pre-capital structure = good! REITs are incentivized to capitalize expenditures to inflate FFO Includes CapEx vs.

6 FFO and NOI CapEx Relationship Incorporates CapEx Incorporates CapEx Ignores CapEx Ignores CapEx Incorporates CapEx Interest Relationship Pre-Interest Post-Interest Pre-Interest Post-Interest Post-Interest Income Tax Relationship Post-Taxes Post-Taxes Pre-Taxes (REITs = pass-thru) Pre-Taxes (REITs = pass-thru) Pre-Taxes (REITs = pass-thru) Core vs. Non-Core Core Business Only Includes Non-Core $ Core Business Only Includes Non-Core $ Includes Non-Core $ Credit Ratios Significance Not Important Not Important Very important for financial covenant ratios Sometimes Important Sometimes Important Use Case(s) Discounted cash flow valuation Virtually none Any project or entity that generates cash flow from real estate ownership Primarily for REITs Primarily for REITs Pitfalls Not true cash figure since starts with EBIT still subject to manipulation of accrual accounting To be avoided at all costs.

7 Use upon penalty of death Shows true operating performance, but not impact of financing Doesn t accurately reflect cash generated or dividend paying capacity Only relevant for REITs that need to show cash flow performance given a CapEx expectation Legend: EBIT = Earnings Before Interest and Taxes; EBITDA = Earnings Before Interest and Taxes and Depreciation and Amortization; T = tax rate 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 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) REIT = Real Estate Investment Trust; NAREIT = National Association of REITs