What it means
Two adjustments separate this measure from ordinary profit. Tax is deducted because it is a real payment, and depreciation and amortisation are added back because they are bookkeeping entries that spread the cost of an asset already paid for.
The measure matters most when appraising investments. A new machine, a store opening or an acquisition is judged on the cash it will produce over its life, and discounted cash flow models are built on after tax cash flows because that is what genuinely accrues to the owners.
There is a subtlety that trips people up: depreciation still affects cash flow indirectly. Even though it is not a payment, it reduces taxable profit, so it lowers the tax bill and therefore increases the cash retained.
This effect is known as the tax shield, and ignoring it understates the value of capital intensive projects. At company level the same idea appears as a rough proxy for cash generation, calculated as profit after tax plus depreciation and amortisation.
It is not as precise as the operating cash flow line in the cash flow statement, which also captures working capital movements, but it is quick and reasonable for comparisons. The main variation to watch is whether interest has been deducted.
A project appraisal usually works with unlevered cash flows, excluding interest so that the investment is judged on its own merits, while an equity holder assessing returns will want interest and loan repayments included. Timing is the other thing to get right, because tax is rarely paid in the same month the profit is earned.
Many businesses settle corporation tax nine months or more after the year end, and a careful model reflects that lag rather than assuming payment falls due immediately.
In practice
Real-world examples.
Example
A hotel group compares two refurbishment options with identical accounting profits. The option with faster tax depreciation produces $180,000 more cash after tax in the first three years, which decides the choice.
Example
A haulage firm evaluating a fleet purchase builds a ten year model on cash flow after tax rather than profit, because the vehicles are paid for upfront while depreciation spreads across a decade.
Example
A private investor assessing a small manufacturing business calculates cash flow after tax of $640,000 against an asking price of $3.8 million. The resulting cash yield of roughly 17% before financing costs frames the negotiation.
Think of it
“After-tax cash flow is what remains after paying taxes-the real spendable amount.
Formula
Calculation
Cash flow after tax = (earnings before interest, tax, depreciation and amortisation - depreciation) x (1 - tax rate) + depreciation
A packaging company appraises a new automated line. In its first full year the line is expected to generate $2,000,000 of earnings before interest, tax, depreciation and amortisation. Depreciation on the equipment is $500,000 a year and the company pays tax at 25%.
Taxable profit = $2,000,000 - $500,000 = $1,500,000.
Tax at 25% = $1,500,000 x 0.25 = $375,000.
Profit after tax = $1,500,000 - $375,000 = $1,125,000.
Cash flow after tax = $1,125,000 + $500,000 = $1,625,000.
The $500,000 of depreciation never left the bank, so it comes back. Note the tax shield at work: without any depreciation the tax bill would have been $2,000,000 x 0.25 = $500,000, so the allowance saved $125,000 of tax in the year.Case study
Seen in the real world.
The following is an illustrative, invented scenario. Thornbury Ceramics, a fictional tile manufacturer, was choosing between two kiln suppliers. Both quoted around $4 million and both promised similar output, so the operations director favoured the cheaper installation.
The finance team modelled cash flow after tax for each over eight years. The more expensive kiln used 18% less gas, which lifted annual pre tax cash by roughly $310,000, and it also qualified for a faster capital allowance that pulled tax relief into the early years when it was worth most.
In this fictional example, cash flow after tax over eight years favoured the expensive kiln by around $1.9 million. Thornbury bought it, and the decision was only visible because the analysis was run on after tax cash rather than on the headline purchase price.
Watch out
Common mistakes.
- Using profit after tax directly as a cash figure without adding back depreciation and amortisation.
- Ignoring the tax shield from depreciation, which understates the cash generated by capital intensive investments.
- Mixing levered and unlevered figures in the same comparison, so one option carries interest costs and another does not.
Questions
People also ask.
Is cash flow after tax the same as operating cash flow?
Not quite, since operating cash flow also reflects movements in stock, debtors and creditors that this simpler measure leaves out.
Which tax rate should be used?
The rate the business actually expects to pay on the incremental profit, which may differ from the headline rate because of allowances and reliefs.
Should working capital be included in a project appraisal?
Yes, any additional stock or customer credit the project requires is a real cash outflow and should be modelled alongside the after tax figure.
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