What it means
The starting point is net profit after tax, which already reflects everything the accountants charged against income. Adding back non-cash items such as depreciation, amortisation, impairments (write-downs when an asset is worth less than its book value) and deferred tax converts that profit into an approximation of cash.
CFAT matters because tax is often the single largest cash outflow a profitable business faces, and any measure that ignores it overstates what the owners can actually spend. It sits between accounting profit, which can be distorted by non-cash charges, and full operating cash flow, which also captures swings in stock and receivables.
In practice CFAT is used to test whether a business can service debt, fund dividends or justify an investment. A bank comparing annual loan repayments with CFAT is asking a very direct question: after the tax authority has been paid, is there enough left to pay us?
Property and infrastructure investors lean on it heavily because depreciation on buildings and equipment creates a large non-cash charge that shelters tax without reducing cash. In those sectors CFAT can be several times reported profit, which is exactly why the measure exists.
The main nuance is that CFAT ignores working capital and capital expenditure. A business can show a healthy CFAT while starving itself of new equipment or while cash is trapped in unsold stock, so it should be read alongside the full cash flow statement.
In practice
Real-world examples.
Example
A commercial property company reports net profit after tax of $1,800,000 and depreciation of $2,200,000 on its buildings and fit-outs. CFAT is $4,000,000, which comfortably covers the $2,500,000 dividend it has promised investors at 1.6 times cover.
Example
An equipment leasing firm compares two contracts. Contract A produces net profit of $500,000 plus depreciation of $700,000 for CFAT of $1,200,000, while Contract B produces net profit of $800,000 plus depreciation of $200,000 for CFAT of $1,000,000. The lower-profit contract is the better cash generator.
Example
A franchise owner running three coffee outlets shows net profit after tax of $250,000 and depreciation of $150,000 on fit-outs and machines. CFAT of $400,000 covers $300,000 of annual bank repayments and leaves $100,000 for refurbishment.
Formula
Calculation
Cash Flow After Taxes = Net profit after tax + Depreciation + Amortisation + Other non-cash charges.
Consider a mid-sized food processor. Operating profit before tax is $4,000,000 and the tax charge at 20% is $800,000, leaving net profit after tax of $3,200,000. During the year the company recorded depreciation of $1,400,000 on its plant, amortisation of $300,000 on licensing software, and a $100,000 impairment on an obsolete production line.
CFAT = $3,200,000 + $1,400,000 + $300,000 + $100,000 = $5,000,000.
So while the profit and loss account shows $3,200,000 of profit, the business actually generated roughly $5,000,000 of spendable cash after tax. If annual loan repayments are $2,500,000, the coverage is 2.0 times, which most lenders would consider comfortable.Case study
Seen in the real world.
Harborline Foods is a fictional chilled-goods manufacturer created to illustrate this concept. In one difficult year it wrote down an ageing factory by $1,900,000, which crushed reported net profit after tax to just $600,000 and prompted worried calls from two of its suppliers.
Its finance team walked those suppliers through the cash position instead. Adding back the $1,900,000 impairment and $1,100,000 of ordinary depreciation gave cash flow after taxes of $3,600,000, more than enough to keep paying trade creditors on 30-day terms.
The illustrative lesson is that a large non-cash charge can make a solid business look fragile. CFAT strips that distortion out, though the company still had to answer the harder question of when it would replace the written-down factory.
Watch out
Common mistakes.
- Treating CFAT as the same thing as operating cash flow. Operating cash flow also adjusts for changes in stock, debtors and creditors, which CFAT ignores completely.
- Adding back the whole tax charge as if it were non-cash. Only the deferred portion is non-cash; the current tax charge is usually paid in real money.
- Using CFAT to judge a capital-hungry business without checking capital expenditure. A high CFAT means little if every dollar must be reinvested in machinery.
Questions
People also ask.
Is CFAT the same as EBITDA?
No, EBITDA is measured before interest and tax, while CFAT is measured after both, so CFAT is the more conservative figure.
Why do property investors favour CFAT?
Because depreciation on buildings is a large non-cash charge that reduces taxable profit, so their cash is typically much higher than their reported profit.
Can CFAT be positive while net profit is negative?
Yes, and it often is when a large impairment or write-down has been booked, since that charge never involved a cash payment.
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