What is Cash Flow After Taxes?

Cash flow after taxes is the amount of net cash flow relating to operations that remain after all related income tax effects have been included. It is usually calculated by adding back all non-cash charges to net income. This measurement is a good way to determine whether a business is generating positive cash flows after the effects of income taxes have been included.

How to Calculate Cash Flow After Taxes

To calculate cash flow after taxes, add together the reporting entity’s net income, depreciation expense, amortization expense, and any impairment charges. The formula is as follows:

Net income + Depreciation + Amortization + Impairment charges = Cash flow after taxes

Example of Cash Flow After Taxes

As an example of cash flow after taxes, a business reports $10,000 of net income. It also has $15,000 of depreciation and $5,000 of amortization, which results in cash flow after taxes of $30,000. The calculation is:

$10,000 Net income + $15,000 Depreciation + $5,000 Amortization
= $30,000 Cash flow after taxes

Problems with Cash Flow After Taxes

The cash flow after taxes concept is a valuable financial metric, but it has some limitations and challenges that can affect its usefulness. Here are the main problems associated with it:

Oversimplification of financial health. The measure focuses only on cash flow, which might overlook other significant aspects of a company's financial performance, such as profitability, liabilities, or capital structure.
Excludes non-operating cash flows. The measure focuses on cash generated from operations after taxes, potentially ignoring cash inflows or outflows from non-operating activities like investments or financing.
Relies on tax assumptions. Calculating the measure requires assumptions about taxes, which can vary based on changes in tax laws, deductions, credits, and deferrals.
Can be manipulated. The measure can be influenced by management decisions about how taxes are calculated or deferred, leading to a distorted picture of cash flow. For example, aggressive tax planning might artificially boost the measure in the short term while creating potential long-term liabilities.
Ignores the timing of cash flows. The measure does not consider the timing of cash inflows and outflows. A company with strong annual CFAT might face cash shortages due to poor cash management within specific periods.
Limited predictive power. While this measurement is useful for understanding past cash flows, it is not inherently predictive of future performance. Future cash flows may be affected by changes in taxes, operations, or external economic factors.