The process of determining the cash flow available to equity holders after all debt obligations have been met is a critical aspect of financial analysis. This methodology involves starting with earnings before interest and taxes (EBIT), adjusting for taxes, adding back depreciation and amortization, accounting for changes in working capital and capital expenditures, and then subtracting mandatory debt repayments. The resulting figure represents the actual cash at the disposal of those holding equity in the company.
Understanding this figure allows stakeholders to accurately value the company’s equity and assess its ability to meet its financial obligations to its owners. It provides a more realistic picture of a company’s financial health than metrics that do not account for debt service. Historically, the rise of leveraged buyouts and increased corporate debt levels have elevated the importance of evaluating cash flows after accounting for debt.
