2.

Net Cash Flows can be identified into two levels first is (So excluded sa FCFF ang financing activities since ang
the net cash Flows to the Firm and the Net Cash Flows to minemeasure ng cash flow na to ay yung core operational
Equity. In this topic we will be tackling the net cash Flows and investment performance ng business, it is independed
to the Firm. The net cash flows to the firm are the amount kung paano siya fina-finance. Kasi ang financing activities,
made available to both debt and equity claims of the such as issuing debt or paying dividends, are external to
company. the firm's core operations and vary depending on the
company's financial structure.)
But if we look at a bigger picture, Net cash flows to the
Firm refers to the net cash flow available to the parties who 3. read
supplied capital after paying all the operating expenses,
4. This is the proforma entry of the net income or indirect
including taxes and investing in capital expenditures and
approach of FCFF………. This method bridges accrual-
working capital as required by business needs. Kilala din
based accounting with cash-based results.
ito as “Free Cash Flow to the Firm” or (FCFF) Using the
discounted cash flow (DCF) method, FCFF is projected So ang ididiscuss today ay ang mga Pro forma variables
and discounted using the firm's weighted average cost of since they provide a detailed projection of a company's
capital (WACC) to determine its enterprise value. So, future financial performance. Para madetermine yung right
kapag mataas ang cash flows this also signals a higher value ng business these ang value ng variables ang
valuation. makakatulong para madetermine yung future cash flows.
Nirerepresent ng FCFF ang pera ng company na 5. First we have NET INCOME AVAILABLE TO
nagenerate from its operations that can be used to reward COMMON SHAREHOLDERS
its investors. Enterprise value-based valuation models
focus on the overall value of the firm. So, instead of just Net income is a company's profit—the amount remaining
looking at what belongs to shareholders (equity), for shareholders after all expenses are paid, including non-
kinoconsider din ng model na to yung mga cash flows cash costs like depreciation and amortization. However, it
available to both debt and equity investors. doesn't account for cash flow changes from working
capital (like inventory or receivables) or investments in
Enterprise value reflects the value of a company’s core assets, which are crucial for understanding the actual cash
operations, based on its net cash flows without considering available.
financing activities. These cash flows focus on operating
and investing activities, excluding financing components.
Then we also have Non-Cash charges… read
6. Let us dig down what are the common non cash items actual cash outflows, they are added back to (or deducted
from) net income to calculate net cash flow.
First, we have Depreciation and Amortization
Lastly the Provision for doubtful accounts
Kapag ang company ay bumili ng fixed asset like
equipment or an intangible asset, binabayaran siya agad These are amounts set aside to cover customers' potential
agad and ang cost na to ay nagrereflect sa balance sheet inability to pay on time, Ang doubtful accounts ay recorded
as the value ng biniling asset. Over time, a portion of this against accounts receivable on the balance sheet. Since
cost is recorded as depreciation or amortization, in effect may chance pa sila of being collected and hindi pa to fully
napapababa nito ang net income kasi recorded siya as written off, they should be added back to net income
expense sa income statement kahit na walang involved na attributable to common shareholders to reflect the
actual cash they represent the allocation of the cost of potential cash flow.
assets over time. However, this reduction is just an
7. Another variable is the After- Tax Interest Expense
accounting entry—as what I have said earlier walang
(Net of any tax savings)
involved na actual cash outflow sa depreciation and
amortization. So, para macalculate ang actual cash flow, In the Philippines, interest expense is tax-deductible,
depreciation and amortization are added back to net meaning it reduces the company's taxable income. As a
income. result, the actual cash outflow is the interest paid minus
the tax savings. For net cash flow (NCF) calculations,
Then we also have Restructuring charges
after-tax interest expense is added back to net income to
Ang restructuring ay tumutukoy sa pagbabago sa focus on cash flows from core operations, excluding the
organizational structure o business model ng isang effects of financing activities, for a clearer measure of
company para adapt to changing economy or business business value.
needs. Kasama rito ang mga pagbabago sa operational
structure ng kumpanya para mas umayon sa business Working capital represents the net investment in current
goals ng company. It often includes employee assets (like receivables and inventory) minus current
separations, requiring severance pay as immediate cash liabilities (like payables). When sales grow, firms often
outflows, following labor laws. Additionally, adjustments need more receivables and inventory, leading to cash
like write-downs of pension assets or reversals of accruals outflows, while higher payables provide cash inflows.
Declining current assets mean more cash is available,
are recorded as restructuring expenses in the income
which is added back to net cash flow (NCF).
statement. Since write-downs or reversals don’t involve
For NCF and valuation, movements in cash, marketable activities. Sa section na to adjusted na ang non cash items
securities, short-term notes payable, and current portions like depreciation and changes in working capital. Here's
of long-term debt are excluded, kasi ang cash and the proforma entry in computing the net cash flows to the
marketable securities ay hindi related sa operations, and firm from statement of cash flows
debt components ay kasama sa financing activities. This
ensures the focus remains on operating cash flows. 10. Here’s an overview of the three sections:
1. Cash flow from operating activities: This shows the
8. Investment in fixed capital directly impacts a
cash generated from the company’s core operations. It
company’s Net Cash Flow (NCF) by reflecting cash
reflects money received from customers, payments to
outflows for acquiring assets like property, equipment, or
vendors, and changes in current assets (like receivables)
intangibles. These investments support growth and long-
and liabilities (like payables). This is crucial for computing
term operations but reduce NCF during the year of
NCF.
purchase. Analysts examine these transactions to assess
the financial strategy and growth potential. 2. Cash flow from investing activities: This shows cash
spent on acquiring or cash received from selling long-term
Net capital expenditures, which are investments
assets, like property or equipment. Only items related to
minus depreciation, indicate growth trends: higher for
operations are included when calculating NCF;
expanding companies and potentially negative for those in
transactions involving financial assets (e.g., stocks) are
slow-growth phases. Similarly, business acquisitions
excluded.
reduce NCF, but only their cash components are counted.
Conversely, proceeds from asset sales boost NCF,
showing cash inflows that offset capital investments.
11. 3. Cash flow from financing activities: This shows
Non-cash transactions, such as acquiring assets cash raised (or repaid) through debt or equity financing. It
using shares, don’t impact current cash flows but are isn't included in NCF because it relates to the company’s
essential for forecasting future cash outflows. Analysts financing, not its operating performance. Instead, these
leverage cash flow statements and balance sheets to figures are used to calculate Net Cash Flows to Equity.
identify these movements and ensure valuations focus on
operating cash flows. This analysis helps clarify the firm’s
financial health and growth dynamics. Analysts also note how interest and dividends are
9. To calculate Net Cash Flow (NCF) from the statement categorized:
of cash flows, analysts focus on cash flows from operating
 • Under IFRS, interest and dividends received can be • But analysts must check:
classified as operating or investing cash flow.
o If these non-cash charges were deducted
• Interest and dividends paid can appear as
when calculating EBITDA, they need to be
operating or financing cash flow.
added back.
o If they weren’t deducted from EBITDA, no
Lastly, extraordinary or one-time items (like a big legal adjustments are needed.
settlement) are excluded from NCF calculations to focus
• Instead of adding back the entire non-cash charge,
on regular business operations.
the tax savings from these charges should be
added back. why? Kasi ang depreciation and
amortization ay nakakabawas sa taxable income,
12. Lastly, the From Earnings Before Interest, Taxes, na nakakapagpababa din sa amount ng taxes na
Depreciation and Amortization (EBITDA) this is the kailangan bayaran ng [Link] reduced tax
proforma entry to get the FCFF read expense results in savings, which effectively
The focus here is to ensure that only the applicable taxes increases cash flow. Adding these savings back
that need to be paid are accounted for. This gives a more helps accurately reflect the cash benefit.
realistic view of the cash flow available to the investor. • The treatment of investments in fixed and working
capital remains consistent with earlier discussions.
These investments are adjusted to reflect their
13. EBITDA stands for Earnings Before Interest, Taxes, actual impact on cash flow, ensuring a true
Depreciation, and Amortization. Ito yung kita ng company representation of the resources available.
before accounting for financing costs (like interest), taxes,
and non-cash expenses (like depreciation and In essence, the adjustments ensure that NCFF provides a
amortization). This metric is often used to analyze a conservative and realistic view of the cash flow net to the
company's profitability and operating performance. investor. Hope this makes things clear!

14. Tax savings on Non-Cash Charges:

• Non-cash charges (like depreciation and
amortization) might not need adjustment if you're
starting with EBITDA.