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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. 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. 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; 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)

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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 + ΔWC Net Income + D&A

– CapEx + ΔWC + ΔDebt 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)

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. 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; 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