Valuation-relevant cash flows represent the actual cash that is expected to be generated by a business and is available either to be reinvested, or distributed to the shareholders. In the context of valuation, these cash flows are critical as they form the basis for determining the intrinsic value of a company.
Net Sales: This is the total revenue from goods sold or services provided during a specific time period without any deductions.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): This is a measure of a company's overall financial performance and is used as an alternative to simple earnings or net income in some cases.
Depreciation & Amortization (D&A): These are non-cash expenses that reduce the value of the company's assets over time due to use or obsolescence.
EBIT (Operating Income): This is the profit a company makes on its operations, not including the effects of interest and taxes.
Tax: Represents the amount of taxes the company is expected to pay.
NOPAT (Net Operating Profit After Tax): Calculated by taking the operating income and subtracting taxes, NOPAT represents the potential cash earnings if the company had no debt.
Depreciation & Amortization (D&A): Even though D&A are non-cash expenses, they are added back to NOPAT in cash flow calculations since they do not represent an actual cash outflow.
Capex (Capital Expenditures): These are the company's expenditures on physical assets like property, industrial buildings, or equipment.
Change in NWC (Net Working Capital): This reflects the change in current assets minus current liabilities from one period to the next, indicating the cash invested in or released from operations.
Changes in other non-interest bearing assets/liabilities: This includes any changes in assets or liabilities that do not bear interest which can impact cash flow.
Tax Shield on Interest: This is the tax saving achieved due to interest payments on debt, as these payments are deductible expenses.
Interest Expense (Net): This is the net amount of interest paid on debts.
Change in Net Debt: This is the change in the company's debt level, reflecting either a cash inflow from taking on more debt or a cash outflow from debt repayment.
Change in Investments: It reflects the cash spent or received from changes in investment levels.
Flow to Equity: This represents the cash flow that is available to the shareholders after all expenses, debts, and reinvestments.
Other effects: Any other items that can influence the cash flow but don't fall under the above categories.
Net Income: Finally, the bottom line of the cash flow statement which indicates the net amount of cash that is expected to be generated after all the adjustments.
Utilizing these percentile figures helps to establish a more robust valuation model by accommodating different market conditions and company performance expectations. By preparing a range of cash flow projections, you can present a comprehensive valuation that captures both the expected outcome (median) and the potential variance (25th and 75th percentiles).