Why Does Net Cash Flow Vary From Equity Valuation to Total Invested Capital Valuation?

What is Net Cash Flow (NCF)?

Net Cash Flow is essentially the amount of cash flow a company has after its liabilities have been accounted for. A company has a basic cash flow, too, but net cash flow is relevant here because it’s used as the figure for business earning in valuations. However, using NCF isn’t that simple.

The Net Cash Flow will vary based on what kind of capital you’re using and, therefore, the type of valuation you perform. When simple equity capital is taken into account, it’s usually because the resources invested in the company are owned by the shareholders. However, when capital is borrowed and then invested, the Net Cash Flow changes because the liabilities change.

NCF in Equity Capital Valuations

NCF in equity capital companies is calculated as the net income after taxes. However, the liability adjustment also includes depreciation, deferred taxes, and amortizations. After the basic liabilities have been adjusted for, net capital expenses, working capital changes, and long-term debt changes will be deducted as well.

The final value is what the NCF will be in a business valuation where equity capital is the main liability considered.

NCF in Invested Capital Valuations

NCF in terms of total invested capital is calculated by taking the net income, subtracting tax amounts, non-cash liability expenses, capital expenses, and the changes in the working capital. After this, the tax-adjusted interest expense needs to be subtracted as well as any dividend amounts you need to adjust for.    The added steps here are to account for the extra liability of the debt capital of the company.

Why NCF Differs — Does It Matter?

The net cash flow changes when the claimant of cash changes. NCF is an important value to account for because it’s the main income that investors will get, which is why it matters in valuations. Takeover valuations and investment valuations need the NCF figure so that the buying party and investors know what they’re getting into.

Looking for an online valuation tool that can perform these complex calculations with ease? At Equitest, we’ve developed company valuation software that has deluxe UX and extensive valuation capabilities.

Contact us today for more information, or check out the pricing here!