EV/Cash Flow to Firm

Category

Ratios

Units

Multiple (x)

Formula

Enterprise Value / Cash Flow to Firm (trailing twelve months)

Source

Calculated by GeminIQ from figures reported in SEC filings

EV/Cash Flow to Firm divides a company's enterprise value by the operating cash flow available to all of its capital providers, lenders and shareholders alike. It shows how many years of that cash flow the market is paying for the whole business, and it is the enterprise-level counterpart of price-to-cash-flow.

Cash flow to firm starts from cash from operating activities and adds back after-tax interest expense. The add-back matters because interest is paid to lenders, whose claim is part of enterprise value. Capital spending is not deducted, which is the difference between this ratio and EV/Free Cash Flow to Firm.

Neither side is a reported figure. Enterprise value is market capitalization plus short-term and long-term debt minus cash and cash equivalents, with the balance-sheet items taken from the 10-Q or 10-K. Cash from operating activities, tagged NetCashProvidedByUsedInOperatingActivities in XBRL, comes from the cash flow statement. Under ASC 230, interest paid is classified as an operating cash outflow, so operating cash flow has already been reduced by it. Adding it back, net of the tax saving it produces, restores the lenders' share.

Data providers calculate the add-back differently. Some use interest expense from the income statement, others cash interest paid from the supplemental disclosure, and the tax rate may be a statutory or an effective rate. The trailing twelve-month version sums the last four quarters of each input, so the ratio stays current between annual reports.

The multiple is useful for comparing companies with different amounts of debt, because both its numerator and denominator include the lenders' claim. It is also harder to flatter than earnings-based multiples, since operating cash flow is less affected by accruals and noncash charges. Its main weakness is that it ignores the capital spending a business needs to maintain its assets. For capital-intensive companies, EV/Free Cash Flow to Firm is the stricter test.